When you’re in business you tend to know the main forces that either compete with you or work with you. For example, your main competitors, your suppliers, your buyers. There are so many factors that can impact profitability of a business. According to the Porter’s Five Forces framework, there are 5 forces that can help you find your competitive position in the market and ultimately impact your profitability.
Why would business owners need to know this?
It’s all about being aware. Aware of what is happening in your industry and the things that affect your industry. if you can look at your business from the outside in, this view can help you identify areas that working well and those that aren’t working as well as you’d like.
Do you know what some of the key issues are that can affect you? Think about regulation in your industry. Is there a change coming? Can overseas visitors or suppliers affect your operation significantly? What is your competition doing at the moment?
You can get a great birds eye view of your industry and the factors that are likely to affect it just by exploring these five forces.
What are the Five Forces?
Developed by Michael Porter from Harvard University, the framework is a method that determines the competitive intensity of an industry. Used a macro tool in business – it looks at the industry’s economy as a whole vs. a SWOT analysis for example, that focuses on a specific company’s data. Using the Five Forces model you can determine whether or not a business can be profitable in relation to other businesses in the industry. In this case, profitability is the biggest indicator of business success not the size of your business.
The Five Forces are:
- Threats of new entry.
How easily can others enter your market and threaten your company’s position?
- How much does it cost and how long does it take to enter your market?
- What are the barriers to entry (e.g. patents, rights, etc.)?
- What does it take to make the business scalable?
- Have you protected your key technologies?
- How strictly is your market regulated?
If competitors can enter your market with little money and effort, you will need to adapt your strategy to handle any potential rivals.
2. Threat of substitution
What is the likelihood of your customers replacing your product or service with an alternative?
- What are the differentiators between your product/service and the substitute?
- How many substitute products are available in this market?
- What is the cost of switching to a substitute product?
- How difficult would it be to make the switch?
- What products or services can you offer that might substitute a market leader?
3. Bargaining power of suppliers
How easily can your suppliers increase their prices?
- How many suppliers does your company have?
- How unique is the product or service that they provide?
- How many alternative suppliers can you find? How do their prices compare to your current supplier? How expensive would it be to switch from one supplier to another?
- 4. Bargaining power of buyers
How much power do your buyers have to drive down your prices? How much leverage do they have?
- How many buyers control your sales?
- How large are the orders you receive?
- Could your buyers switch suppliers—and how much would it cost for them to switch?
- How important is your product/service to your buyers (i.e. what is the ROI of your product/service)?
- 5. Competitive Rivalries
The four previous forces largely affect this last one. You need to look at the number and strength of your existing competitors.
- How many competitors do you have?
- Who are your biggest competitors?
- How does the quality of their products or services compare with yours?
- What distinguishes your company from the competition?
- What will it cost one of your customers to switch to a competitor?
How to Use Porter’s Five Forces Model
The Porter’s Five Forces Model can help you to analyse the attractiveness of your particularly industry, assess investment options, and measure competition intensity.
Start by looking at each of the five forces in turn, and how they apply in your industry. Ask yourself the following questions:
- Is rivalry between competitors intense or do you tend to retain customers relatively easily?
- Do you have lots of suppliers to choose from or do you rely heavily on a small group of suppliers?
- Is buyer power high or low?
- Would buyers find it easy to substitute your product or service?
- Do new competitors find it easy to enter the market or is it difficult?
Think about how your analysis will likely impact you. This analysis can help you to think through what you could change to improve your competitive position and increase your profitability.
If you find yourself in a weak position, the model can help you to think about what you can do to move into a stronger one. We can help with your plan or strategy. Get in touch with one of our team to talk through your situation in more detail and get your profitability on the right track.