In the current business climate, it’s incredibly difficult to enter an unsaturated market. If you’ve got a business idea, chances are somebody’s already doing something similar. So how can you make sure your business succeeds in this competitive environment?
Thankfully, there are a number of tools and frameworks available to help you make informed strategic decisions — like Porter’s Five Forces Model. This is a management tool that can help you understand the competitive dynamics of your industry, and it’s based on the idea that there are five forces that influence competition.
In this article, we’ll take a closer look at Porter’s Five Forces Model and discuss how you can use it to improve your business strategy.
What is Porter’s Five Forces Model?
In 1971, Harvard Business School professor Michael Porter developed and published the Five Forces Model to help businesses understand the complex dynamics of their industries, as well as their own viability. Rather than intensely focusing on the competition, Porter was passionate about understanding all the factors that influenced a company’s success.
Porter’s model looks at all the factors — both internal and external — that influence competition.
There are five forces that make up this model:
- Competitive Rivalry,
- Supplier Power,
- Buyer Power,
- Threat of Substitution, and
- Threat of New Entry.
We’ll explore each of these forces in more detail below.
1. Competitive rivalry
This force is all about how intense the competition is in your industry. It’s determined by a few different factors:
- The number of competitors in the industry. How many other businesses are competing for the same market share?
- The size of the competitors. Are the businesses in your industry small, medium, or large?
- The aggressiveness of the competitors. How willing are they to compete? Will they cut prices, launch new products, or expand into new markets to gain market share?
- The intensity of the competition. How much are the businesses in your industry fighting for customers?
2. Supplier power
This force looks at how much power suppliers have in your industry, and how easy it would be for them to raise prices or reduce the quality of their products. The determining factors include:
- The number of suppliers in the industry. The more suppliers there are, the less power they have collectively.
- The importance of the supplier to the industry. If a supplier is essential to your industry, then they have more power.
- The availability of substitutes. If there are other suppliers that can provide a similar product or service, then they have less power.
3. Buyer power
Buyers have power when they are less in number than the businesses they are buying from, when they are very price-sensitive, when the quality of the product is important, and when there are a lot of choices.
The implications of buyer power can be significant for businesses; your buyers will likely switch to a lower-priced supplier, or they may dictate certain terms to you because you cannot afford to lose their business.
4. Threat of substitution
Sometimes, a company will release a product that customers can easily replicate using their own resources or a combination of other products. This is known as a threat of substitution, and it can be a major issue for businesses.
Take, for example, the photography industry. With the advent of digital cameras, people can now take high-quality photos without having to spend money on a professional photographer. This has led to a significant decline in the demand for traditional photography services.
Another example might be mid-level graphic design services. Unless you are working for a high-end client, there is a good chance that your potential customers could use software like Canva to create their own designs at a minimal cost.
5. Threat of new entry
The final force is the threat of new entry, and this looks at how easy it is for new businesses to enter your industry. How low are the monetary and non-monetary barriers to entry?
If it’s easy for new businesses to enter your industry, then the competition will be stiff, and you’ll likely experience a lot of pricing pressure. On the other hand, if it’s difficult for new businesses to enter your industry, then you might have a bit more breathing room.
Marketplaces like Amazon KDP have become far too saturated as a result of the low barriers to entry. Anyone can publish any book they want without an editor, cover artist, or ad campaign budget — so if you are trying to make money as an author, it’s now increasingly difficult.
Does Porter’s Five Forces Model have any downsides?
There is far too much emphasis put on monitoring and obsessing over your competitors, and Porter’s model helps break through this myopia.
It can be used to help identify which markets are attractive, and how best to defend against competitive threats. It also helps you understand what’s important to your customers and how they make decisions. However, Porter’s Five Forces is not a panacea — it has its limitations.
For instance, it can be used to understand how a company is performing, but it’s not so good at predicting future trends. Today’s business world is faster-paced than the ’70s when Porter first proposed the model; nowadays, the model might not be as effective at predicting future industry changes or anticipating the trajectory of your business.
In addition, it can be difficult to apply the model in certain cases, such as when there are multiple buyers or sellers. It also doesn’t take into account a company’s unique strengths and weaknesses.
Regardless, this tool is still excellent for getting your team thinking about how your business is positioned in the market, and how you can improve your performance. It includes incredibly crucial concepts for all business leaders to understand.
How to use Porter’s Five Forces Model
We’ve covered the Five Forces, its strengths, and its limitations — but what can you do with that information?
Well, now that you understand the dynamics of your industry, you can use this information to make informed strategic decisions.
For example, if you’re in a highly competitive industry and supplier power is high, then you may need to find new suppliers or develop a relationship with a key supplier to maintain your competitive edge.
If rivalry is high, then you may need to focus on differentiation and innovation to set yourself apart from the competition.
The Five Forces Model can also help you assess opportunities and threats in your industry. For example, if you see that new entrants are entering the market, this could be an opportunity to expand your business.
Alternatively, if you see that industry profit margins are shrinking, this could be a sign of a potential threat to your business.
Analyzing your business against the Five Forces
To close out the article, let’s run through some winning strategies for using Porter’s Five Forces to your advantage.
1. Analyze your current business concept. Perhaps create a document and write out each of the five forces, with space underneath for you to brainstorm what you can do to improve your position.
Print out the document or forward it around to your team. Ask everyone to think about how your company stacks up against each factor, and how you could potentially improve.
2. Look at your competition — but don’t get tunnel vision. Porter’s framework provides a way to look beyond your competition and understand the dynamics of your industry as a whole.
This can help you develop a more well-rounded strategy that takes into account not only what your rivals are doing, but also the other forces at work in your market.
3. Use Porter’s Five Forces to make informed decisions about future opportunities and threats.
If you’re considering expanding into a new market, for example, Porter’s Five Forces can help you assess the attractiveness of that market and understand the risks involved.
The same goes for potential threats — if you see that industry profit margins are shrinking, for example, this could be a sign that a particular market is about to become saturated.
4. Get creative with your strategy. The Five Forces Model can help you develop a more targeted and well-rounded strategy, but it’s not the only tool in your arsenal.
Don’t be afraid to get creative and use other methods to come up with new ideas. Brainstorming, market research, and competitor analysis can all help you develop a more comprehensive strategy.
5. Use the Five Forces to track your progress. As your business evolves, it’s important to track how the Five Forces are affecting your position.
Are new entrants entering the market? Is supplier power changing? Is rivalry increasing?
By tracking the changes in each of the five factors, you can ensure that your business is always adapting to the current environment.
If you have been struggling to ‘make it’ within your industry, it may be time to take a step back and assess your standing. Thanks to Porter’s Five Forces, you can do just that.
This business tool is incredibly effective at understanding how your business is performing in the market, and how you can improve your position. It’s not perfect, but it’s a great starting point for better understanding your industry — and that’s something all businesses can benefit from.