When surveying an industry, it can be difficult to understand where to start, and what to focus on. The Porter’s Five Forces framework is a useful macro framework that can be used to develop corporate strategy within an industry. This framework helps companies understand the competitive landscape of the industry they are competing in, and helps them determine how to best position for long-term success. While more detailed analysis techniques are available, this framework provides companies with a high-level assessment of their industry and help companies plan at a macro level.
According to Michael Porter, the forces that shape industry competition can be visualized as in the below image:
The Five Forces
Rivalry amongst existing competitors
Existing competition is one of the most important factors to evaluate when entering a new market. The more rivalry that exists amongst the competitors, the higher the barrier and cost will be to compete. When conducting analysis of existing competition, it is important to look at the number of competitors, as well their equivalent products and services. The level and intensity of competition will impact how much a business can charge and how much power it will have within the market.
Threat of new entrants
A company’s ability to control and establish itself in an industry is heavily dependent on how much time and money it would take for other competitors to join the marketplace. Industries with high barriers to entry allow an existing company to charge more. If an industry has low barriers to entry, then existing players must remain flexible and creative to ensure differentiation. Some barriers to entry include government regulations, economies of scale, and high levels of competition.
Bargaining power of suppliers
Examining an industry’s bargaining power of suppliers looks at how much power a company’s goods and materials vendors have to raise prices. Key factors affecting this include the number of suppliers, how unique their inputs are, and the switching costs associated with finding a new supplier. The more suppliers that are available in a market, the less power they have, as companies can easily switch providers with better costs and terms.
Bargaining power of buyers
The bargaining power of buyers measures how much power consumers have in a given market, and their effect on price and quality. When the number of sellers greatly outweighs the number of buyers, the bargaining power of buyers is high, as switching between suppliers is relatively easy. This force also takes demographic and cultural factors into consideration, as not every customer has the same values, incomes, traditions, and relationships with material goods or services.
Threat of substitute products or services
This force assesses how easy it is for a company’s product to be replaced in a market. Substitute products or services which can be used as effectively as your own company’s products or services are a threat. It is crucial for companies to learn how to differentiate products or educate their customers about why their product is superior. If substitutes are not readily available in a given market, a company will have more power to increase prices and push for more favorable terms. If substitute products are more easily available, competitors can undercut prices to win customers or force you to lower prices.
How can competitive intelligence help?
While developing a corporate strategy, a company will often use the Five Forces framework to ensure that they are considering all the relevant angles. HelloInfo regularly supports clients in understanding how these Forces can be understood and utilized as market entry and growth strategies are pursued. Schedule a call with us to find out how we can help your company break into a new market.
