Don’t Put Your Money at Risk Due to This 1 Factor

When it comes to understanding the competitive strengths and weaknesses of a company or an industry, Porter’s Five Forces, a framework developed by Harvard Business School professor Michael Porter, could be useful.

I had previously shared four of the Five Forces: the threat of new competitorsthe bargaining power of buyersthe bargaining power of suppliers; and the level of competitive rivalry within an industry.

The final factor could worth noting for all your investments: the availability of substitutes.

What’s for lunch? 

For this factor, I would like to use the example of Japanese food purveyor, Japan Foods Holdings Ltd (SGX: 5OI).

The company may be best known for its string of Ajisen Ramen stores around Singapore. Beyond ramen, Foolish folks may also have come across one of its 15 different restaurant brands (some are actually franchised from Japan while some are self-owned) like Fruit Paradise, Menya Musashi, and Osaka Ohsho.

Competition for the hungry customer’s dollar

The line-up of Japanese-themed brands may look impressive, but we would be mistaken if we consider Japan Foods as competing with other Japanese fare alone.

That’s because competition may come from local Singaporean hawker food, or new Vietnamese pho concepts, or a whole lot more. After all, the real competition is for the hungry customer’s dollar, and that does not come from Japanese food alone.

Along the same vein, Foolish investors would be best served if they consider the competitive rivalry within the industry (in this case, Japanese-themed fare), and also viable substitutes which can replace the industry’s offerings to earn the customer’s dollar.

Furthermore, the relative price of substitutes and buyers’ propensity to the substitute may also have effects on the industry.

I hope you enjoyed following this mini-trip around Porter’s Five Forces.

If you would like to learn more about the framework, check out my colleague Stanley Lim’s take on locally listed companies:

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chin Hui Leong does not own shares in any company mentioned.