Understanding your competition is more crucial than ever. With so many methods of gauging the market place, its hard to determine who the key players are, potential new entrants who may pose a threat, and where your firm stands in all this.
Porters 5 Forces Helps cut through some of the clutter, creating a model in which one can survey the key players in their industry. (Marci Martin, 2018)
Understanding both the competitive forces and the overall industry structure as crucial for effective strategic decision-making. In Porter’s model, the five forces that shape industry competition are as follow:
- Competitive rivalry
This force examines how intense the competition currently is in the marketplace, which is determined by the number of existing competitors and what each can do.
Rivalry competition is high when there are just a few businesses equally selling a product or service, when the industry is growing and when consumers can easily switch to a competitor’s offering for little cost.
When rivalry competition is high, advertising and price wars can ensue, which can hurt a business’s bottom line.
- Bargaining power of suppliers
This force analyzes how much power a business’s supplier has and how much control it has over the potential to raise its prices, which, in turn, would lower a business’s profitability.
In addition, it assesses the number of suppliers available: The fewer there are, the more power they have. Businesses are in a better position when there are a multitude of suppliers.
- Bargaining power of customers
This force examines the power of the consumer and their effect on pricing and quality. Consumers have power when there aren’t many of them but there are plentiful sellers, as well as when it is easy for customers to switch from one business’s products or services to another’s.
Buying power is low when consumers purchase products in small amounts and the seller’s product is very different from any of its competitors.
- Threat of new entrants
This force considers how easy or difficult it is for competitors to join the marketplace in the industry being examined.
The easier it is for a competitor to join, the greater the risk of a business’s market share being depleted. Barriers to entry include absolute cost advantages, access to inputs, economies of scale and well-recognized brands.
- Threat of substitute products or services
This force studies how easy it is for consumers to switch from a business’s product or service to that of a competitor. It looks at the number of competitors, how their prices and quality compare to the business being examined and how much of a profit those competitors are earning, which would determine if they can lower their costs even more.
The threat of substitutes is informed by switching costs, both immediate and long-term, as well as a buyer’s inclination to change.
Martin, Marci. “Porter’s Five Forces: Analyzing the Competition.” Business News Daily, 25 Sept. 2018, www.businessnewsdaily.com/5446-porters-five-forces.html.