Porter’s Five Forces Strategy
To succeed in the market and stay ahead of your competitors , we need thorough industry analysis to examine the changing environmental influences and triggers. The brainchild of Michael E Porter created in 1979 is an effective framework for assessing and analyzing the competitive strength of the company.
These five forces framework help us to understand the industry’s attractiveness and position itself against the rising market forces and industry players.
Before we define the framework , some of the significant risks that entrepreneurs overlook are in ‘defining’ the industry are:
- They either define the industry too broadly or narrowly
- Not considering the industry value chains
- Lacking analysis on specific market requirements , understanding different customer segments , strategic groups and understanding of the geographical preferences of the market.
- Competitive Rivalry
As competitive rivalry increases, companies tend to perform much better as the customer has the power to make choices now. These rival organizations are those who have similar products targeting the same customer groups. The factors that define the competition in the industry are high fixed costs, industry growth and exit barriers.
2. Threat of Entry
Is it easy to enter the industry or not , as it depends on the intensity of the competition.
A good industry has many entry barriers like the need for huge capital, government support and restrictions, direct response from industry incumbents and supplier control.
3. Threat of Substitutes
Substitutes are the alternative products or services that could serve the same purpose like a tablet can be for a pc or laptop. Businesses should be very alert and consider these two important points :
a) Outside industry threats : substitute threats can also come from other similar industries which calls the responsibility of the business leaders to look for business challenges from relevant concepts.
b) price factors : managers need to keep an open eye on the sensitivities of the consumers and the industry factors if they are influenced by price wars.
4. Power of Buyers
If buyers have controlling power , they can demand for low prices and other benefits that could eventually reduce the profit margins of the organizations. This may arise if buyers have more options and the switching cost is low or they are concentrated and dominate the market.
5. Power of Suppliers
Suppliers become powerful when the switching cost is high , suppliers are concentrated , products have differentiation and when they can cut the competition and act as intermediaries.
