Porter’s five forces pinpoint and evaluate five competitive forces that shape up every aspect of an industry. The analysis helps determine the right corporate strategy by identifying the industry’s structure.
The model is named after Michael Porter, a professor at Harvard Business School. Porter’s five forces apply to every part of the economy, and it will help you understand the competition level within your industry. Hence, you can use it to boost the long-term profitability of your company or startup. Here, in this blog, we have also listed porter’s 5 forces template.
Table of Content
Porter’s 5 Forces Defined
You must be curious as to what are these five forces that I talked about in the beginning. Well, they are:
- The threat of new entrants
- Threat of substitutes
- Bargaining power of customers
- Bargaining power of suppliers
- Competitive rivalry
Let’s examine all these five forces in detail.
The Threat of New Entrants or Substitutes
These competitive forces can either be new entrants to the industry or complete outsiders that act as substitutes. Their competitive rivalry has the potential to attract customers to their side.
You may have seen the airlines losing many frequenters to other alternatives like cars, trains, or cruise ships. New competitors to this business often create a competitive environment among different commercial air services to gain more consumers, reducing the overall profitability.
Bargaining Power of Customers and Potential Suppliers
Consumers and suppliers have the power to disrupt a company’s value chain.
Many customers prefer paying less and getting more, whereas the distributors may want to charge more and supply less. Having a thorough understanding of them will help you determine opportunities and threats.
Competitive Rivalry
This force refers to the competitors within your industry. Take, for example, the fierce rivalry between Elon Musk’s SpaceX and Jeff Bezos’s Blue origins. Both companies compete aggressively with each other to gain space contracts by Nasa.
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Why is Porter’s Five Forces Model Important?
The analysis is beneficial as it shares insights into different parts of your business.
- Find out the reasons that are impacting the profitability. By performing a five forces analysis, you will realize the factors that are preventing growth or profit. Also, uncover newer competitive advantages for your company.
- Take better decisions on business expansion or increasing the capacity. Understanding the competitive forces and their impact on your company is essential. Michael Porter’s model will empower you with information that will aid you in making the right decisions regarding expanding your organization to a new industry or boosting the overall capacity.
- Create an overall strategy. Five forces analysis will help you realize what determines profitability and shapes the entire market. With this knowledge, you will forge a business strategy that takes full advantage of your industry strength and holds its weakness into account.
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How to Use Porter’s 5 Forces?
Consider Threats of New Entry
Is it easy for new entrants to threaten your company’s market position?
- Who are your new entrants?
- What’s the cost of entering your market?
- Are there any barriers to entry?
- Is the market regulated tightly?
- What one has to do to scale?
These are the questions that you must address. Do an introspection on the competitive rivalry your business experiences, how many rivals you have, and where do your product and services stand compared to theirs.
Having fewer competitive rivalries is good, but it doesn’t last forever. A highly competitive market may look unappealing, but it will steer you forward in ushering innovation in your product and pricing.
Consider Threats to Substitution
What are the chances that your consumers will overlook your service or product for a different one?
Are there any substitutes in the market that are more viable than yours? What is the price of shifting to that one?
When assessing substitution threats, analyze the impact that your product had on customer’s lives. Your brand should be able to adapt to any changes in your consumer’s behavior. Try offering a new service or a cheaper alternative in that situation.
Consider the Bargaining Power of the Suppliers
How would you deal with the situation where your suppliers are demanding a higher price? How many potential suppliers can take this route? Is it easy for you to switch suppliers in this scenario?
Like you, suppliers are running a business. Hence, they perform similar strategic calculations as you do for your company.
If the supplier’s services are niche, there is a high chance that they will charge more, which can affect your bottom line. Always take supplier power into account.
Consider the Bargaining Power of Buyers
How many buyers does your company have currently? Can savvy customers switch suppliers? If they are switching suppliers, how much would it take to affect your bottom line? How essential is your service or product to your consumers?
Like suppliers, buyers’ strong calculations can negatively impact your company too. The above questions will guide you in determining buyer power.
Treat your consumers as businesses, even if they are not. Remember that customers are business-savvy and often shop around to observe how your competitors measure up.
Consider your Rival Competitors
Who are your current competitors? Are they powerful? How do their product or services compare to yours? What makes your business unique from theirs? Will your consumers lose anything if they choose your rivals over you?
Through these questions, determine your current competitive environment. Observe how your competitors are succeeding or failing in their endeavors. Many companies only analyze how they are better, and I feel that it’s a mistake.
It is an important process to understand in what ways your competitors are better than you. Be frank with yourself. It’s how your company will grow in the future.
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Porter’s Five Forces Template
Here is Porter’s five forces template for PowerPoint and Google Slides. You can use this forces framework template for assessing and evaluating the company’s competitive strength and market position.
This five forces analysis template has editable graphics and text placeholders.
It refers to the pressure that customers can exert on companies to provide higher quality products, better customer service, a good deal, and lower prices.
Yes, it is still relevant today. The idea is that every company is operating in a network of suppliers, buyers, substitutes, new entrants, and competitors that are still valid.
It is the ease with which suppliers increase their prices. How many potential suppliers do you have, is their product or service unique, and would it be expensive to switch from one supplier to another? All this indicates supplier power. Having fewer suppliers will put you in a position where you are more dependent on them than vice versa.
It is about how strong the supplier’s position is and their ability to demand higher prices and dictate terms
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