Business Theory Analysis: Porter’s Five Forces

In an extremely quick summary of Michael Porter’s Five Forces – this is a framework for analyzing a company’s competitive environment and determining all the factors that may influence a company’s profitability. Each of these forces act on your business and on every single company in the world. The amount to which each force applies pressure to your business results in the amount your company will notice a change in its profitability.

These factors can be divided into 5 main “Powers” or “Forces”. In the diagram above they can be seen as follows:

• Threat of New Entrants

How simple it is for a new company to enter your industry’s market and how quickly they could scale can determine greatly how much of your market share can easily be taken by others and how much of your business’s profitability can be under threat due to increased competition. In short, is there anything stopping others from doing the same as you are doing? From patents, to regulations, to high start-up & scaling costs. Or is there something that you can do, to stop your customers from leaving, even if another company enters your market – such as creating a sense of brand loyalty among your customers which makes them fall in love with what you do so even if they try your competitors’ products, they still come back and continue to use your product or service.

• The Bargaining Power of Suppliers

How much can your suppliers influence you if they decide to change your prices. If there are many suppliers in the market, then if your current one decides to raise your prices, you can change to the next supplier, so long as there are no notable differences in the products that they supply and how capable your company is to go through with this change. A very good example of a situation where this didn’t go too well was when the famous fast-food brand KFC decided to change the company, they used to deliver their chicken from their farms to their restaurants in Ireland and the UK. The issue came, when they found out that even though the delivery service of both the previous and new supplier was the same – they both delivered with trucks – however, the distribution centers which the old supplier had in place to deal with the volume of produce which KFC had for them was too much to deal with for the new supplier. They couldn’t handle the same volume and it took months for the new company to build brand new distribution centers and meet KFC’s requirements. So be wary – even though you may be ready to switch, you must make sure all parties are capable of going through with such a change so it can be a success!

• The Threat of Substitute Products

Are your competitors in the market with a product or service that is either similar to yours or at least completes a similar purpose to yours? Then how likely are your current and potential customers to choose them over you and what you can offer them? If there is something unique about your product which can’t be imitated and which brings value or a perceived benefit to your customers, then there is less of a chance that they choose to go elsewhere in search of something more. Sometimes, the products themselves may be identical, but the experience, brand image, or marketing between companies may be the deciding factor. Find out how to separate your firm from the rest. If you can’t be the best in quality. At least be the one gives them that little bit more!

• The Bargaining Power of Buyers

Conversely to The Bargaining Power of Suppliers, here the question is how much can your clientele influence you? If you have millions of customers, then one person not liking your product or how much you charge won’t make a difference. However, if you have 4 clients and two of them don’t like what you’re doing or how you’re creating your product? Well then in most cases, you best believe you’re going to pay attention to how you can change your way to not lose half of your sales! Sometimes though, if you do only have those 4 clients and this time even if 3 of them don’t like your products, but the 4^th one does, and the 4^th one accounts for 80% of your purchase orders and revenue for the year, then you will be quicker to forget what the three smaller clients want and focus on finding more customers like that magical number 4!

& Finally:

• Rivalry among Existing Competitors

The 5^th force in Porter’s Five Forces is that of the pressure within the industry which is created by Existing Competitors. This is in the center of the circle as they are forces which affect everything within your company. This can affect your employees if a competitor with more financial backing decides to try and poach your best talent by offering them much higher wages than you can afford or they can affect your customers by creating a campaign which makes them seem like the better brand. Here once again we broach the subject of brand loyalty and how you can compete for a limited market. Whether you can compete with them through price, through quality, or through added benefits or loyalty, finding a way to stand out from competitor businesses will help you find a footing for your business in the marketplace. Did your clients choose you simply because you were the first to offer them something or do you actively fight to keep these clients as yours?

Papers upon papers have been written on the subject of Michael Porter’s Five forces and they are vital to be understood by any business specialist in today’s world. You don’t have to be a CEO or a business owner to notice how all these forces apply to the company you are in now. These forces can help you when negotiating salary, when fighting for a promotion, or when you act as an intrapreneur and find a way to help your company stand out in a competitive market environment! This is such an important factor that we have decided to dedicate an entire article to entrepreneurs and intrapreneurs later in the year so make sure you stay subscribed to these newsletters to stay on top of our latest releases!

Written by Lenard Adanov