Porter’s Five Forces – definition and examples
Porter’s Five Forces model or analysis is a strategy tool. It helps companies analyze and understand the factors that affect the business environment. It is a simple but extremely powerful tool that can help you identify which strategy your company should take.
By analyzing the five competitive forces, we can determine how profitable or attractive a company is.
The forces also determine the amount of competition there is by looking at other companies within the same industry.
The Five Forces analysis also helps companies see the effects of new trends, as well as industries in which to compete.
Put simply; the analysis helps us determine what position the company should take if it seeks greater profits and success.
Porter’s Five Forces – Michael Porter
Harvard Business School Professor Michael E. Porter first introduced the Porter’s Five Forces model in 1979.
Prof. Porter stated that the Five Forces are key factors in the competitive environment of an industry.
However, companies can get caught with temporary factors that aren’t as relevant.
Some short-term factors are technological innovations, industry growth rates, and government interventions.
It’s important to remember that the Five Forces are permanent key factors in the industry.
Porter’s Five Forces
Competitive rivalry
This force looks at competitors you have, how many there are, and the quality of what they provide.
Depending on what they are doing and what they are capable of, you can decide on a strategy.
If competition is intense, you will need high impact market strategies, or even a better, a price strategy to attract more customers.
On the other hand, if there is low-level competition, you can take advantage of it to increase profits. In other words, if there is virtually no competitive rivalry, you will have enormous strength and potentially huge profits.
Suppliers’ bargaining power
This force analyzes a business supplier’s power. It also analyzes how much control the supplier has over prices, i.e., can it raise them easily? Raising prices would undermine your company’s profitability.
Additionally, it looks at how many suppliers there are out there. If there are lots of them, then each one does not typically have much power. However, if there are just a couple, they will be powerful.
A business is in a better position if it has access to many different suppliers.
Customers’ bargaining power
This force examines consumers’ power to influence pricing as well as quality.
The fewer consumers there are, the more powerful each one is. Consumers are also powerful if there are lots of sellers.
If a consumer can easily switch from one product or service to another easily, they have power.
When customers buy products in small quantities, their purchasing power is low. This is especially the case if the seller’s product or service is very different from those of its competitors.
Consumers are people, companies, or other entities that purchase or hire goods or services. They do not buy something to then sell it on or make something else.
Threat of industry newcomers
This force looks at how hard it is for newcomers to enter the marketplace and compete effectively.
If your industry is an easy one for newcomers to enter, the greater the risk to your market share. In other words, easy industries to get into mean your market share is always at risk.
Barriers to entry are good for you if you are already in the industry, but bad for newcomers.
Barriers to entry are hurdles or obstacles that new entrants have to overcome when trying to break into a new market.
Access to inputs, economies of scale, famous brands, and cost advantages, for example, are barriers to entry.
Substitute products and services
This force examines whether consumers can switch products or services easily. In other words, how easily and rapidly can they stop buying from you and buy from your competitors.
To determine this, it is necessary to know how many competitors there are. You also need to know how their prices and quality compare to yours, as well as their profits.
You must find out what their profit levels are to determine whether they could reduce prices even further.
According to BusinessNewsDaily.com:
“The threat of substitutes are informed by switching costs, both immediate and long-term, as well as a buyer’s inclination to change.”
Video – Porter’s Five Forces
This Bee Business Bee video explains what the concept of Michael Porter’s Five Forces is.