Businesses can use Porter’s Five Forces to analyse and outmanoeuvre their competitors
Knowing your competitors and how their products, services, and marketing strategies affect you is vital for survival. Competition directly influences your success, whether you are an FT100 company or a small, local business.
The five forces model developed by Michael E. Porter is a good way to get an idea of how your company stacks up against your competitors. According to Porter, five factors determine whether a business can be profitable in an industry:
- The threat of new entrants
- The bargaining power of suppliers
- And the bargaining power of customers
- The intensity of the rivalry
- The presence of substitute products
Combining Porter’s Five Forces model and SWOT analysis will help you improve your position in the market.
A Porter’s Five Forces analysis examines the economy of the entire industry, whereas a SWOT analysis focuses on a specific data and analysis.
According to Porter, strategists should be just as concerned about the health of their industry as they are about the health of their own company. He explains that understanding the competitive forces can identify the causes of current industry profitability (Porter, 2009).
Comprehending Porter’s Five Forces Model
Porter believes that comprehending the competitive forces at work in addition to the overall industry structure is crucial for strategic, effective decision-making and developing a competitive strategy for the future.
Porter’s five forces shape most industry sector competition.
Competition is competitive
Rivalry is determined by the number of existing competitors in the market and their capabilities. Consumers are more likely to be drawn to a competitor’s offering when a limited number of businesses offer a product or service when the industry is growing, and when switching costs are low. When rivalry is intense, price and advertising wars can destroy a business’s bottom line, which happens when consumers are drawn to a competitor’s offering.
When bargaining with suppliers, you want to be in a strong position
Using this metric, you can estimate how much control its supplier has over the cost of raw materials and resources and how much that impacts the firm’s profitability. The metric also determines how many suppliers are available, and the fewer of them there are, the more control they have. Having multiple suppliers is good for businesses.
Customers’ bargaining power is weak
There are two kinds of consumers and, therefore, two types of buying power. A few consumers with many sellers and low switching costs can create considerable buying power. Conversely, consumers who believe in small quantities and for whom the seller’s products differ significantly from their competitors’ products have little purchasing power. This force examines the power of the customer and its effect on pricing and quality.
There is the danger of new competition
An established business is at a higher risk of losing market share if it is easier for new competitors to enter the market. Barriers to entry can include cost advantages, economies of scale, access to inputs and strong brand identity.
The presence of alternative products or services that may supplant yours is called a ‘competitor threat’
This force evaluates the ease customers can switch to a competitor’s product or service. It examines the number of competitors, their prices and quality, and how much profit they make, which would determine whether they can lower their costs even more. Switching costs, both immediate and long-term, and consumers’ inclination to switch by assessing the threat of substitutes. Make sure you can fully work out the cost of goods sold (COGS) to benefit from this strategy. Stay ahead of the competition with a competitive analysis.
Porter’s Five Forces example
Porter’s Five Forces can be applied to many different industries to help identify potential opportunities and threats to a business.
Approach to Success
After you finish your analysis, it’s time to develop a method to increase your firm’s competitive advantage. Porter offers three generic strategies that may be used in any sector (and by any size firm) to that end.
Being the cheapest
Your objective is to either increase profits by reducing costs or increase market share by lowering the sales price while maintaining industry-standard prices.
Having different things is what makes things interesting
A company must thoroughly research and develop its products to implement this strategy. The products must be significantly better than the competition’s, enhancing their competitiveness and value to the public. Sales and marketing must be effective as well.
Concentration on a single subject is key to success
The corporation should focus on selected niche markets to successfully market its products. An in-depth understanding of the market, its retailers, consumers, and competitors is required. A more complete version of Porter’s 1985 book Competitive Advantage (Free Press) is available.
There are five forces that shape Porter’s theory of competitive advantage
Despite its effectiveness and longevity, Porter’s Five Forces model has been criticised for its inability to account for strategic alliances. In the 1990s, Adam Brandenburger and Barry Nalebuff of the Yale School of Management pioneered the concept of ‘complementors,’ the sixth force, using game theory tools.
According to Brandenburger and Nalebuff’s model, a complementor sells products and services that are best used in conjunction with one of its competitors’ products or services. In other words, Intel, a processor manufacturer, and Apple, a computer maker, would be examples of complementors.
Additional tools may help you better understand your business and its potential. The BCG matrix helps companies decide which products to invest in to gain the most significant competitive advantage. A value chain analysis reveals where companies can achieve the most significant product advantage.
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