Porter’s Five Forces Model was derived by Michael.E.Porter (professor of Harvard Business School) in the year 1979. It is a simple framework that helps in identifying all different types of factors of the competitive environment that have an impact on your business in one way or the other.
These five factors are closely studied for framing competitive strategies in order to gain an upper edge from your rivals or competitors present in the market.
Here are the Porter’s Five Forces Model for competitor analysis:
- 1- High Competition In The Industry
- 2- Risk of New Competition
- 3- Threats From Substitutes of Your Offerings
- 4- Competitive Bargaining Power of The Customers
- 5- Risky Powers of The Suppliers
- How Do You Use Porter’s Five Forces Model?
- Porter’s Five Forces Model In Strategic Management
- Advantages of Porter’s 5 Forces Model
- Disadvantages of Porter’s 5 Forces Model
- Examples of Porter’s 5 Force Model
1- High Competition In The Industry
Competition of the industry is inversely proportional to your growth.
The more number of competitors present in the market, offering a similar range of products and services, the lesser the chance of you sustaining and growing your business and vice-versa.
In order to sustain in the market full of competitive rivalry, you have to lower your price to attract more buyers and suppliers.
When the rivalry is intense, the marketing and advertising costs are also high.
While on the other hand, if you have a market with almost negligible or low competition, you can simply enjoy the perks of higher prices, resulting in increased sales revenue.
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2- Risk of New Competition
Power of the company can be affected by the entrance of the new competitors.
The easier it is for a competitor to enter the market or industry, the more damage it will do to an already existing business and his market share.
While on the other hand, industries that are highly difficult to enter or have strict barriers for entrance like monopoly businesses, the scope and probability of competitors coming in the industry will be less.
Sectors that have rigid barriers of the entry can charge high prices and negotiate better terms and conditions.
Apart from this, the strict-barrier industry can ultimately enjoy the perks of economies of scale, lesser cost of productions, and unshakable brand image.
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3- Threats From Substitutes of Your Offerings
Companies that deal in making products or providing services that can not have close substitutes can enjoy the benefits of high prices, and lower advertisements cost.
While businesses that manufacture products that can be easily substituted by likewise products, it will be difficult to sustain in the market.
If the market has many substitutes available, then you might have to lower your prices to the extent that can question your sustainment in the market.
Decreasing prices can have a substantial negative impact on the overall functionality of the business in the short-run as well as long-run operations.
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4- Competitive Bargaining Power of The Customers
The bargaining powers and ability of customers can affect the business to a destructible extent. The customers have the power to bargain only when the total number of buyers are less, and the total number of sellers are more.
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Here, the customer can easily be lost and redirected to the competitors. While if the total number of buyers are more as compared to sellers, the power of bargaining reduces at an exponential rate, allowing sellers to enjoy the perks of high and competitive pricing.
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In the situation where buyers are more than sellers, you can also save upon costs of advertising and marketing.
5- Risky Powers of The Suppliers
Suppliers work as a direct influence on the overall cost of production. If your supplier is providing you with costly raw materials, then the ultimate cost of production is going to be high.
And if your cost of production is comparatively high, you can simply not add up the desirable profit margins because it will ultimately increase the selling price.
Unfortunately, because of increased competition in terms of sellers and substitutes, lesser people will tend to buy your products, having a negative impact on your business in the long run. This is the case only when the suppliers are scarce.
If the total manufactures are more than the suppliers, then the supplier’s power will be suppressed, allowing the manufacturers to enhance their profits.
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How Do You Use Porter’s Five Forces Model?
Porter’s Five Forces Model allows you to analyze the powers of various influential elements throughout your journey, starting right from acquiring raw materials from the suppliers to selling your products to the end customer.
Once you have thoroughly analyzed your business and the factors affecting it, you will be able to frame competitive strategies to gain an upper edge.
Furthermore, it is crucial to note that the data related to all the five factors won’t be readily available for you to analyze. You sometimes have to carry out research, and if you still lack information, you can assume certain things.
Consider seeking help from whitepapers, magazines, articles or alike data repositories to get answers to your questions.
From the above mentioned five influential forces, you can control the impact on some while the others are merely beyond your controlling powers.
The factors that you can influence by strategizing your plans include employees, internal research and development, cost of production, quality of products, and management.
At the same time, the factors that have a direct impact on your business but are beyond your control include government laws, tax slabs, pricing, suppliers, customers, political forces, etc.
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Hence you should only focus upon things that you have control over and can minimize the effect of the impact from outside elements.
Porter’s Five Forces Model In Strategic Management
In order to derive competitive strategies along with its management, you have to follow a systematic yet straightforward process. It starts with gathering information from all the possible sources.
The data collected can either be from primary sources like surveys, Q&A forums, interviews, etc., or from secondary sources like white papers, magazines, journals, newspapers, research papers, etc. making the most out of the collected data by organizing, classifying, recording, analyzing, representing in meaningful stats finally framing competitive strategies.
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Once the information is collected from all the possible sources, it is now time to analyze it using various statistical methods, and the analysis is carried out to identify which forces affect the industry in what manner and to what extent.
Factors affecting industries would differ from one to another, along with the intensity of the impact.
Hence, it is essential to consider that the data you collected is from the same industry.
Once you have computed and analyzed the data, it is now time to frame meaningful, impactful, and competitive strategies for your business that can help you effortlessly reach your goals.
You can further revisit your strategy in order to check the progress or to re-frame it in case of any deviations from the pre-decided plan to the actual one.
Advantages of Porter’s 5 Forces Model
1- Helps in Taking The Next Big Step
Conducting a competitive analysis is undoubtedly one of the integral parts of any marketing or advertising strategies. In order to move a step ahead of your competitors, you must have to know your competition back to front.
And to know that, you must know about the strengths and weaknesses of your competitors. Knowing the strengths and weaknesses of your competitors will give you a fair idea about what mistakes they have done in the past that you should absolutely avoid and what are the good things they follow that you should get inspired from.
2- Offers Detailed Competitive Analysis
To get the exact idea about the market and the influential forces, Michael Porter’s 5 Forces Model is used because it just does not help in doing competitive analysis.
In fact, it goes an extra mile in order to identify particular aspects that have a negative impact on your business. Competitor analysis is all about analyzing your competitor’s strategies.
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3- Helps in Identification of Internal Strengths
With the help of Porter’s model, you will be able to identify your internal strengths, weaknesses, potential threat to your growth and the available opportunities in the market.
Disadvantages of Porter’s 5 Forces Model
1- Incomplete Analytical Framework
One of the significant downsides of Porter’s five forces model is that it incorporates a general analytical framework. It just provides a list of factors that either has an advantage or the downside to your business.
There are many other analytical frameworks like SWOT analysis which facilitates in-depth research and investigation about all the factors coming together in the business environment and are responsible for the overall performance of the organization.
2- Studies Only Qualitative Measures
The five forces given by Porter studies all the qualitative aspects of the business environment. And it ultimately lacks the quantitative one.
Moreover, the data gathered for analyzing and framing competitive strategies may be biased and can have a direct effect on the integrity of the research analysis.
3- Lack of Scope
Porter’s five force model doesn’t serve the purpose of analyzing for the firm that has multiple product portfolios or deals in several markets or industries. It is because the data gathered and analyzed is of an individual sector.
Collecting information related to other products range or industry and then integrating it in order to frame strategies is a challenging task.
4- Non Competitive Framework
The framework of the five forces model by Porter is applicable only for the companies that have a motive of making money. In simple language, for Not-For profit organizations, this framework is of no use.
Examples of Porter’s 5 Force Model
1- Competitive Rivalry
Talking about competition in the industry, a sportswear brand Under Armour faced intense competition from its competitors like Adidas, Nike, Skechers, etc. the competitors comparatively have a larger pool of resources at disposal.
They are merely playing around in the sports apparel industry to penetrate the market and capture the market share. While on the other side, Under Armour does not hold any patent for fabric or process and hence always carries a risk of the designs or process getting copied in the near future.
2- Bargaining Powers of Customers
Under Armour has a wide range of suppliers spread across the globe. In addition to that, the products of Under Armour are manufactured in many countries across the world, which restricts the bargaining power of the suppliers.
3- Bargaining Powers of Suppliers
The products of Under Armour are either purchased by the wholesalers or the end customer itself. However, it is crucial to take a note that the wholesalers have the leverage to a certain extent because it is straightforward for them to replace Under Armour’s products with that of its competitors in order to gain extra margins.
But the odds of the end-customer being able to enjoy the bargaining power is less because the brand holds unquestionable recognition and reputation in the market.
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4- Threat of New Entrants
In this case, the entrance of new competition is comparatively less because of the high cost of investment in terms of either setting up, marketing, advertising, manufacturing, and ultimate logistics. It is important to note that businesses that involve high investment do not attract new entrants easily.
5- Threat of Product Substitutes
The demand for sports apparel and performance wear expected to grow in the near future at an exponential rate because people are becoming more health-conscious than ever. Hence, the threat of end-customers substituting your products in the near future is not a thing to be worried about.
Conclusion
Understanding the Porter’s Five Forces model is essential to analyze your competition and its strategies. Analyzing your competitors is actually an integral part of your business that helps you grow better with each passing day. A wise man said, people who learn from other’s mistakes undoubtedly succeed in life.
