Profitable businesses with higher returns always attract new firms resulting in reduced profits for all firms in the industry. Substitute products perform similar functions or satisfy similar needs of an existing product; unfortunately, their threat emerges when the product is cheaper. Porter states threat substitute occurs when companies within an industry compete with those producing similar products (28). Therefore, a threat of substitutes force should recognize customers ‘right to buy products of their choice.
Competitive rivalry makes companies to compete carelessly in a non-profitable manner and even create price wars that damage the returns in the end (Rainer & Turban 10). Tesla Motor’s mainly competes with BMW Company that also manufactures electric and luxurious cars. Since its foundation with no preexisting internal-combustion models, Tesla focuses on promoting the electric car while their competitor manufactures electric cars that fit into an existing lineup of internal-combustion models filling a specific role that Tesla left uncovered.
Threat of New Entrants is one of the Porter’s Five Forces. The multi-national competitors set price and quality standards which are difficult for new entrants to meet since they enjoy economies of scale. Competition from substitutes is another force that affects both the profit and sales. It only threatens part of the value making the product, but logistics and branding remain unaffected (Rainer & Turban 9). The bargaining Power of Suppliers may also affect the productivity of the Tesla Motors. For manufacturing purposes, automobiles require inputs that have an effect on profitability; hence, it is important to monitor input cost. In addition, Bargaining Power of Buyers is the ability of customers to negotiate prices extracting profit from the seller. Finally, Rivalry among competitors also reduces the profit margin especially when setting low cost below the standards to attract more customers.
Porter, M. Competitive Strategy. New York: Free Press, 1998. Print.
Turban, Efraim, R K. Rainer, and Richard E. Potter. Introduction to Information Technology. New York: John Wiley, 2001. Print.