Understanding Porter's Five Forces Analysis
Analyzing your competition is one of the keys to identifying business threats, as well as figuring out how to address them. Determining who your competition is, and how their movement, tendencies, and decisions will affect you is integral to every bit of your planning, both current and future. Whether you are a company of thousands of employees or a small local business, competition will always have a direct impact on your success.
One way to examine your competition is through the use of Porter’s Five Forces Framework model, which allows you to break them down into five definite categories, designed to uncover insights. This model was originally developed in 1979 by Michael E. Porter from Harvard Business School. These five forces business model looks at five specific factors which ascertain whether or not a business can be profitable, with data based from other businesses in the market. This theory is based on the idea that there are five forces that determine the attractive of a market, along with the intensity of competition. Moreover, these help identify where the power lies in a business situation.
Porter postulates that understanding each competitive force, along with their underlying causes reveals the essence of an industry’s profitability, all the while providing an extensive framework that anticipates influencing competition over a certain amount of time. He also adds that a healthy industry structure is one that should be a competitive concern to other companies, as much as they are focused on their very own. How do these powerful five forces work?
Understanding the Five Forces
Porter regarded that understanding both the competitive forces and the general industry structure is vital to creating effective and strategic decisions. Here are the five forces that shape the industry competition:
- Competitive rivalry
Competitive rivalry is the force that observes the intensity of current status of competition in the marketplace. This status is determined by the number of existing competitors, and what each of them can do. Rivalry is high when there are only a few businesses selling a product or service equally, and when the industry is continuously growing and consumers can easily switch to a competitor’s offer for little cost. When this is high, advertising and price wars happen, and can result to hurt a business’s plan.
- Bargaining power of suppliers
The bargaining power of suppliers is the force that determines the scope of a business’s supplier power, and the extent of control it has over the potential to raise costs. This directly lowers a business’s profitability. Moreover, this force assesses the number of suppliers available in the market. The fewer present, the more power they hold. Businesses, then, are in a much better position when there are plenty of suppliers available.
- Bargaining power of customers
The bargaining power of customers is a force that looks at the power of the consumer, along with their effects on pricing and quality. Consumers hold power when there aren’t many of them around but sellers are plenty, as it is very much easy for customers to switch from one product or service to another. The buying power becomes low when consumers avail of products in small amounts and the seller’s offer is different from its competitors.
- Threat of new entrants
The threat of new entrants is a force that considers the level of difficulty in which competitors can join the marketplace in the industry under examination. The easier it is for a competitor to join the market, the greater the risk of the market share of a business to be depleted. Factors that prevent entry include access to inputs, economies of scale, absolute cost advantages, and well-recognized brands.
- Threat of substitute products or services
The threat of substitute products or services is the force that scrutinizes how easy it is for consumers to switch from a certain product or service to that of another. It also examines the number of competitors, along with factors at play like how their prices and quality compare to one another, as well as the profit they are generating. All of these determine if they can lower their costs even more, to appeal to consumers. The threat of substitutes is determined by switching costs, both long-term and immediate, as well as the buyer’s behavior of inclination to switch.
The Benefits of Using Five Forces
One of the key advantages of this model is that it helps the company gauge the competition in the current industry. The pricing power of the company is inversely proportional to the competition currently present in the market, so the higher the competition, the lower the pricing power and vice versa. Knowing this can successfully help current and future planning. Industries that require huge investments are also tricky, because once an investment has been made, all hands are tied. A Porter analysis can help successfully identify those competitors who pose threats of substitutes and new entrants, as the pricing of the industry of a whole can decrease. This model can also help businesses deal successfully with both buyers and suppliers, as companies often operate at the mercy of the power of suppliers and consumers.
Using the Five Forces: What do you gain from this?
Porter’s Five Forces transfer into two trains of thought: do what others are doing but do it cheaper, or do something no one has ever done before. Existing businesses have the option to either build on what they already have through maximizing efficiency and taking on new trends. Facebook, perhaps, is the best example: they have established themselves as a leading social media platform, but they continue to expand by building the Messenger app, online buying and selling, dating, as well as using chatbots. What can you do?
- Simply become a cost leader
Look for a way to make your product as cheap as possible without compromising quality so as to ensure sustainability of profit. Your consumers expect standards from you, so you need to deliver what they ask for. Never sacrifice quality for price, and businesses often look at their processes and cut costs to make this happen. Analyze your processes through a flowchart, and take out what isn’t necessary.
- Distinguish your product
Your product should be branded as unparalleled and unique. Search for that missing link and examine the next steps. How will your product evolve now to outshine the rest of them?
- Focus on your buyers
Take a look at your buyers, and that market you’re yet to tap into. What is each buyer’s unique need? Are they searching for a specific product no one else is offering, or is it specific to a certain geography or demographic ? Determine how you can position your business to be at the top of customers’ minds. Always keep careful watch of your competitor’s actions, and find a way to do it better, or cheaper, suiting perfectly to your buyer’s needs.
The industry structure continuously develops, and it is important that you remember that it is not static. Over the course of time, suppliers and buyers become more or less powerful. Innovations make way for new competitions and product substitutions. Changes also alter the intensity of the competitive market, and the overall path of the industry. This makes using the Five Forces model essential in adapting to change to help your business keep survive and thrive.
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