Model Name : 5 Forces Model
Creator : Professor Michael Porter
Year : 1979
Purpose : It is an influential tool to understand competitive forces as to exhaust the possibilities of profitability and success
Are you keeping a close eye on your competitors?
If you are, then you already know that’s a surefire way of keeping yourself updated. However, looking beyond your competitors’ actions and observing other factors that could possibly impact the business environment is also a crucial part of winning the competition.
To do so, understanding Porter’s Five Forces is a must.
Already familiar with the term? That’s no surprise. After all, it is one of the most frequently implemented business tools worldwide.
However, you may not be fully acquainted with the purpose of these forces. This is why I want you to pay close attention to the narrative that you will be reading next.
1. Competitive Rivalry
You need to pay attention to the strength as well as the number of your competitors.
To do so, consider asking yourself the following questions:
- How many competitors do you have in your industry?
- Who are they?
- Is the quality of their service or products comparable to yours? If yes, how?
- What will it cost your clients/customers to switch to a competitor?
If the rivalry is nominal and no one in the market is doing what you are doing, you are most likely to have healthy profits and great strength.
If the competitive rivalry is strong, companies or businesses can attract clients/customers with high-impact marketing campaigns and aggressive pricing. Or, in markets where there are a lot of competitors, your customers can go elsewhere if they feel that you are not offering a good deal to them.
Remember Zune? Well, not many of us know that Microsoft launched Zune to beat the iPod. But, it failed rather spectacularly.
Why? The answer is quite simple.
Apple had already succeeded in establishing the image of the iPod as cool and trendy. Not to mention, the iPhone launched just 6 months after the release of Zune, substituting the need for an iPod.
2. Supplier Power
This force examines how easy it is for your suppliers to upsurge their prices and therefore, affect your bottom line.
Ask yourself the following questions:
- How many potential suppliers does your company have?
- Do you have a unique service or product?
- How many alternative suppliers can you locate?
- Are the prices of those alternative suppliers comparable to your existing supplier?
- How costly would it be to switch your supplier?
Think strategically, but remember your supplier would do the same. If your supplier recognizes that there are some other companies that could fulfill the same need, they are likely to charge you more for their unique service.
If there are fewer suppliers in the market, their position will be stronger, and you will be needing more of their help, making them capable of charging you more. However, if you have more options, it will be easy to switch to a less expensive supplier.
Hence, the supplier can impact your profit in a significant way!
3. Buyer Power
Do buyers have the power to bring your prices down? To find out the answer, ask yourself the following questions:
- How big are the orders that you receive?
- How many of them control your sales?
- Are they powerful enough to dictate terms to you?
- Could your buyers switch suppliers?
- If they switch, how much would it cost them?
- How significant is your service or product to them?
These questions will help you determine the power your buyers/customers have to dictate your prices.
The more the customers, the more power you retain.
4. Threat of Substitution
This part of the model refers to the likelihood of your customers replacing your service or product with an alternative that fulfills the same needs as your service/product.
To determine this, consider the following questions:
- What are the differences between your product or service and the alternative that they chose?
- How many alternative products or services are available in the market?
- What much would it cost them to switch?
- How difficult would it be to switch?
- What services or product can you come up with to substitute a market leader?
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Do you supply a distinctive software product that automates a significant process? Well, people may substitute it by outsourcing their work or by performing it manually. This, in turn, would threaten your profitability and weaken your market position.
Speaking of substitution, remember those portable CD players? This question may attract all kinds of funny looks as I know, you have probably not heard about it in years as nobody uses it anymore.
But the reality is that those CD players were pretty popular back in the 90s and even early 2000s. But, what happened then? iPods! iPod is what happened to them.
People switched to this new technology of iPod as it fulfilled the same needs (and more!) as the portable CD player but in an even more convenient, attractive, and efficient way.
Price is not always the reason for switching.
5. The Threat of New Entry
Ponder over how easy it is for others to enter the market and threaten your market position.
To determine this, consider the following questions:
- How much does it cost to enter your market?
- How long does it take to enter the market?
- What does it take to make the company ascendable?
- What are the barriers to entering the market?
- Are your critical technologies protected?
- How firmly is your industry regulated?
If you have minimal protection for your important technologies or if it takes little effort and capital to enter the market and compete effectively, the rivals can easily and swiftly enter your market to threaten your position.
However, if there are durable and strong barriers to entry, you may maintain your market position and take good advantage of it.
How to Employ the Five Forces
There are two ways of adapting the five forces:
- Do what everyone is doing but with low-cost and to become the cost leader.
- Do what has never been done earlier; brand your product as unique.
Example of Porters Five forces for the Coca-Cola Company
So, to embrace success and maintain or improve your market position, examine Porter’s Five Forces within your industry.
This will enable you to have a greater understanding of where you currently stand and how you can adapt your strategy to outshine your competitors and move your business to the next level!
References & more information
Video Source: Harvard Business Publishing
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