Porter’s 5 forces: how to use the model to run a successful business?

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Porter’s 5 forces: how to use the model to run a successful business?
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No matter what size a company is, it is affected by competition in the market. Knowing your competitors, their product, and marketing strategies allows companies to find their place and determine their own competitive advantages. Michael Porter’s five forces model is considered one of the most effective strategic business tools.

Description of Michael Porter’s 5 Competitive Forces Model

This model was developed and described by the American economist, Harvard University professor Michael Porter in 1979, however, the model does not lose its relevance today.

The basic idea of ​​competitive forces begins with the notion that business owners and managers often view competition in an industry or niche too narrowly, and the five forces indicate that in addition to the company being in a constant battle for profit with its direct competitors, its position is influenced by a wider range of forces:

  • new competitors (potential);
  • suppliers;
  • consumers;
  • substitute goods (substitutes).

If a company is just planning to enter the market, then the model will allow you to see and analyze risks, assess the intensity of competition in the niche and understand whether the company is worth developing in the niche.

If the company is already operating in the market, the five forces model will help control risks, take the necessary measures in a timely manner, be flexible to changing external conditions and maintain a high level of profitability.

Michael Porter
Michael Porter. Picture: isc.hbs.edu
The Five Forces are therefore a holistic view of any industry and an understanding of the structural factors that underlie a company’s profitability and competence. It is this model that allows us to look especially closely at those factors that provide advantage and competitiveness.

Characteristics of the main forces of the Porter model

1. Threat of new players

To assess the possibility of the emergence of new competitors, Porter identified 6 barriers to entry into the market.

  1. Economies of scale. Deterrs entry by forcing the player to either enter the industry on a larger scale or accept increased costs.
  2. Product differentiation. The more diverse the offer of goods and services in the industry, the more difficult it is for new players to enter the market and compete in it.
  3. Capital requirement. The need for high capital expenditures. The higher the investment level for entry, the more difficult it is for new players to enter the industry.
  4. Initially low costs. Companies may initially have more favorable conditions that are not available to competitors (subsidies, patents, experience curve, etc.).
  5. Access to distribution channels. Sales channels can be controlled by other players, through partnerships or vertical integration.
  6. Public policy. Restrictions and regulation of product requirements in the industry.

2. Bargaining power of buyers

Buyers influence the competitiveness of a company’s product in the market. In such conditions, companies have to more closely monitor the quality of their products, increase it or reduce the price. In addition, you need to monitor emerging needs, which will subsequently shape trends.

The more choice a buyer has among manufacturers on the market, the more intense the struggle between them.

Bargaining power of buyers is influential if:

  • customers make purchases in large volumes;
  • the company has non-unique products without a clear USP;
  • purchased products account for a high share of consumer expenses;
  • dissatisfaction with the quality of goods sold on the market or the need of buyers for new conditions, functional characteristics and properties of goods;
  • high sensitivity of buyers to price, due to which there may be a need to reduce costs.

3. Bargaining power of suppliers

The cost of goods, the volume of products produced, and the company’s assortment largely depend on the activities of suppliers. The power of suppliers increases significantly if:

  • there are only a small number of them in the industry;
  • the volume of raw materials does not cover the needs of all interested companies;
  • threat of supplier integration into the core business, which creates vertical integration;
  • lack of substitute products.

4. The emergence of substitute goods (substitutes)

According to Porter, the threat of substitute products is the presence of a product from another industry that offers the same benefits and benefits to the consumer. And these are not always products of direct competitors. For example, you can solve the issue of organizing your hobby by going dancing or painting.
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If the demand for one substitute product increases, then the demand for another naturally decreases, thus it becomes possible to find alternatives in terms of price and quality.

In order for a company to maintain superiority and consumer loyalty, it is necessary to invest in branding, marketing, and build a strong positioning, thereby distinguishing itself from direct and indirect competitors.

5. Intra-industry competition

Competition within the industry is essentially a “tug of war”, trying to increase its market share by any means possible, winning a larger number of loyal consumers.

The conditions for intensifying competition within the industry are:

  • a large number of companies whose sales volumes are almost equal;
  • weak growth or decline in market growth, which leads to a redistribution of the market as a whole or a redistribution of its shares.
  • difficulty for companies to exit the industry, which leads to a high concentration of companies in a market with low profitability.
  • the products of competing companies are poorly differentiated, which leads to consumers switching from the products of one manufacturer to the products of another.

How to use Porter’s Five Forces Model?

In order to assess the degree of influence of each force on the company’s activities, it is necessary to assign a score to each parameter that reflects a low, medium or high degree of risk for the company. It is most convenient to do this in the form of structured tables.

Porter's 5 forces
Picture: mbamanagementmodels.com

To do this you need:

  1. Each force is divided into criteria that must be assessed on a three-point scale, where 3 is a strong degree of severity, 2 is an average degree, 1 is a weak degree. Place a plus next to the correct value.
  2. Calculate the total number of points for each table and correlate them with the values ​​​​proposed by Porter.
  3. Summarize the results and develop areas of work for each force.
  4. Once all the forces have been analyzed and evaluated, it is necessary to summarize the results by looking at the data as a whole. You can also use a table format for this step.
  5. Then we need to formulate key areas for developing a competitive strategy.

The final step of Porter’s five forces model is to select and implement the most relevant strategy for the company. Michael Porter in his work derived three basic and universal strategies.

Brand differentiation

When implementing this strategy, the main goal of the company is to differentiate itself from competitors by improving product quality, its properties, functional characteristics, and external attributes.

Focus

The main goal of this strategy is to search for less competitive niches. In such niches, as a rule, it is easier to develop and promote a brand due to the low concentration of competitors.

Cost management

The goal is to reduce costs, thereby increasing market share and profit due to the volume of products sold. This strategy is used when there is a risk of decreased demand.

It is worth emphasizing that this model is not static, it can change under the influence of external factors, in which case there will be a need to revise the results and evaluate the parameters. Analysis is recommended to be carried out regularly in order to track changing trends and emerging needs, thereby increasing the company’s competitive advantages and reducing the impact of possible risks on it.
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Vladislava Noga
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