Porter’s Five Forces is a model that helps organizations to gain a better understanding of their industries and competition. Published for the first time by Professor Michael Porter in his book “Competitive Strategy” in the 1980s. The model breaks down industries and markets by analyzing them through five forces:
- Competition in the industry
- Potential of new entrants into the industry
- Power of suppliers
- Power of customers
- Threat of substitute products
Porter’s five forces is a business framework which can provide a qualitative assessment and come up with a corporate strategy.
Breaking down Porters’ five forces
This force examines the intensity of the competition in the marketplace. The competition is given by several factors such as barriers to entry, the bargaining power of buyers and suppliers and the threat of substitute products or services.
Barriers to entry
Imagine operating in a business where anyone can become your competitor. This is a market where there is no high capital requirement to start a business, and there are no particular regulations in place to limit the entrance from new competitors. For example, in today’s world where anyone with internet access can create its blog or website with very few overhead costs, barriers to entry are very low, therefore the competition is fierce, and it is tough to keep the market share for too long.
Bargaining power of suppliers
This force studies the numbers of suppliers in the marketplace. Indeed, a smaller number indicates the power of those suppliers to dictate prices. A more significant number shows no power of those suppliers over price control. For example, Coca-Cola operates in a market where the suppliers are neither concentrated nor differentiated. Indeed, Coke ingredients such as caffeine and sweetener can be easily found in the marketplace. Therefore suppliers, in general, cannot control prices.
Bargaining power of customers
This is the flipside of the power of the supplier. Imagine a business where there are very few customers and switching between one supplier and the other is extremely easy. Undeniably, this gives total control to customers to set the prices they want. Going back to our previous example, Coke is very powerful to its bottler suppliers.
Threats of substitute products or services
This force examines how easy it is for customers to switch from a product or service to the other. For example, Coke is extremely powerful in relation to its can manufacturer. Indeed, competition among can suppliers is fierce. Also, the threat of substitution is very high. In effect, Coke can easily switch to plastic bottles.
Having analyzed the factors that influence an organization through Porter’s five forces, a company can draw conclusions on its corporate strategy and integrate it with its business strategy, to maintain a competitive advantage.
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