How is Porter’s five forces model useful outside of a business school?
Porter’s Five Forces is an analysis model to explain why various industries can sustain certain levels of profitability. Michael E. Porter’s model is commonly used to analyse a company’s industry structure and corporate strategy. Porter determined the five forces that play a part in defining every (most) market and industry in his booked called Competitive Advantage. So, how is Porters five forces model useful outside of a business school?
Applying Porter’s Five Forces outside a business school can enable you to adjust your business strategy and use your resources better to generate higher investor earnings.
Porter’s five forces are:
1.Competition in the industry
The volume of competitors and their ability to beat and outperform you. The more competitors and the number of similar products and services offered, the less power a company will possess. Suppliers and buyers look for your competition to provide them with a better deal or lower prices. Also, when competitive rivalry is low, you will have more power to charge higher fees, set advantageous terms of agreements, and gain more sales and profit.
2. New entrants into an industry
The lower the cost for a rival to enter a market and the quicker they can become an effective competitor, the more weakened your position. An industry with a high barrier to entry is perfect for existing companies within the industry. You will be able to charge the prices you wish and the terms you want.
3. Power of suppliers
The power of suppliers isolates how easy it is for your suppliers to drive up the cost of inputs. The number of critical goods or services suppliers plays a significant role in this. Also, how unique these inputs are. And also, how much it would cost to switch to another supplier. Fewer suppliers to an industry, the more you depend on them. Resulting in the supplier having more power. This power could enable them to drive up costs and push for other advantages. Many suppliers or low switching costs between suppliers will allow you to lower your costs and enhance profits.
4. Power of customers
Customers’ ability to drive prices down and their associated power is one of the five forces. It’s dependent on how many customers you have. And how significant each customer is to you is determined by how much it would cost to find new customers for your offering. A small and powerful client base could mean that each of your customers has more power to negotiate lower prices and better terms. A company with many smaller, independent customers has an easier chance to charge higher fees and increase its profitability.
5. Threat of substitutes
Substitute products or services that can be used instead of what you offer pose a threat. Companies who provide products or services with no close substitutes have more power to increase prices and lock in better terms. When there are several substitutes around the market, It will give customers more options than yours—weakening your power to charge what you need to make a decent profit.
Then there is the Innovation pace. Innovation Pace is how technological changes can rapidly make existing businesses obsolete. As technology advances, old business models must continually reinvent themselves to stay relevant. Innovative ideas such as Uber, Airbnb, Spotify, Netflix, and Airbnb face competition every day.
How is Porters five forces model useful outside of a business school?
Porter’s Five Forces model helps your increase profits. Still, like most things associated with Competitive Intelligence, you must continuously be on the lookout for any changes in the five forces and, if deemed acceptable, adjust your business strategy accordingly. This article was called How is Porter’s five forces model useful outside of a business school, and it briefly explained the usefulness of the model in business.