How Porter’s Five Forces Can Help Small Businesses Analyze the Competition
Porter’s Five Forces offer businesses a way to analyze and outmaneuver their competitors in the marketplace.
Your ability to survive depends on your ability to identify your competitors and understand how their goods, services, and marketing tactics effect you. Competition directly affects your success whether you are a Fortune 500 firm or a tiny, local business.
Using Porter’s Five Forces model is one technique to assess your rivals and comprehend your place in your business. The five forces model, first created by Michael E. Porter of Harvard Business School in 1979, examines five distinct aspects that influence whether or not a business can be profitable in comparison to other businesses in the field. Understanding where your firm or business fits in the industry landscape will be made easier by using Porter’s Five Forces in conjunction with a SWOT analysis.
A SWOT analysis is a microanalytical tool that focuses on the data and analysis of a single organization, whereas Porter’s Five Forces is a macro tool that examines the industry’s economy as a whole.
In a Harvard Business Review article, Porter stated that “understanding the competitive dynamics and their underlying causes uncovers the foundations of an industry’s current success while giving a framework for forecasting and influencing competition (and profitability) over time.” “Strategists should be equally concerned with their industry structure and their company’s position in the market.”
Understanding the Five Forces of Porter
Porter proposed that formulating sound, strategic decisions and creating a compelling competitive strategy for the future require a grasp of both the competing forces at work and the overall industry structure.
The five forces Porter identifies as influencing industrial competition are
1. Competitive opposition
This force assesses how fiercely the market is competitive. It takes into account the amount of current rivals and what each one is capable of. When there are few companies selling a good or service, when the market is expanding, and when customers may quickly and affordably switch to a competitor’s product, then competition is high. When there is fierce competition, advertising and pricing wars break out, which can be detrimental to a company’s bottom line.
2. The supplier’s negotiating position
This force examines the degree of influence and control a supplier may have on the possibility of price increases, which would diminish a company’s profitability. It evaluates the quantity of raw material suppliers and other resources that are offered. They have more influence the fewer suppliers there are. When there are many suppliers, businesses are in a better position. Find out more about locating vendors and B2B partners.
3. Customer negotiating power
This force looks at consumer power and how it affects prices and product quality. When there are fewer of them, consumers have more clout; nevertheless, when there are many sellers, consumers can easily switch. Conversely, when consumers make minor purchases of goods and the seller’s offering differs significantly from that of its rivals, their purchasing power is limited.
4. The risk of new competitors
This force takes into account how simple or challenging it is for rivals to enter the market. The risk of a market share loss for an established business increases when new competitors find it simpler to enter the market. Absolute cost advantages, access to inputs, economies of scale, and strong brand identity are a few of the entry-level barriers.
5. The potential availability of inferior goods or services
This task force investigates how simple it is for customers to move from a company’s product or service to one offered by a rival. In order to assess whether they can cut their expenses even further, it looks at the number of competitors, how their prices and quality compare to the business under consideration, and how much profit those competitors are making. Both the short- and long-term switching costs, as well as the propensity of consumers to switch, are factors that influence the danger of replacements. To keep one step ahead of rival companies in the market, learn how to do a competitive study. Make sure you are able to calculate cost of goods sold accurately in order to benefit the most from this technique (COGS).
Porter’s Five Forces illustration
There are numerous instances where Porter’s Five Forces can be used to analyze different sectors. Finding opportunities and risks that could affect a firm is the ultimate objective. Trefis, a stock analysis company, examined Under Armour as an illustration to see how it fits into the athletic apparel and footwear market.
- Competitive Rivalry: Nike, Adidas, and newer competitors all pose fierce rivals to Under Armour in the market. With significantly more financial resources at their disposal, Nike and Adidas are making a drive for market share in the burgeoning performance gear market. Because Under Armour lacks any fabric or manufacturing method patents, its product line may one day be imitated.
- supplier bargaining power: A diversified supply base reduces the bargaining strength of suppliers. Numerous companies based all around the world manufacture Under Armour’s goods. As a result, Under Armour has an edge because suppliers’ leverage is reduced.
- Customers’ negotiating power: End users and wholesale clients are among Under Armour’s clients. Wholesale clients, like Dick’s Sporting Goods, have some negotiating power since they can replace Under Armour products with those of the company’s rivals to increase margins. Customers who are end users have less negotiating leverage because Under Armour is a well-known brand.
- Threat of new competitors: The entry of fresh companies into the sports apparel market is constrained by the high capital expenditures needed for product demand generation, branding, and advertising. However, currently operating businesses in the sportswear sector may eventually enter the market for performance gear.
- Threat of competing goods: It’s anticipated that demand for athletic footwear, gear, and accessories will only increase. As a result, Under Armour is not currently threatened by this force.
After you’ve finished your analysis, you should put your strategy into action to increase your competitive edge. Porter identified three general tactics that can be used in any sector to achieve this (and by companies of any size.)
Your objective is to either expand market share by lowering the sales price while maintaining profits or to improve profits by decreasing costs while maintaining industry-standard prices.
Then adopt this strategy, your business’s products must be much superior to those of the rivals, increasing both their competitiveness and consumer value. Effective sales and marketing, as well as in-depth research and development, are necessary.
For successful implementation, the business must pick niche markets where to offer its products. It necessitates a deep comprehension of the market, its vendors, customers, and rivals. Porter’s 1985 book Competitive Advantage contains more details on the generic strategies (Free Press).
Porter’s Five Forces alternatives
Despite being a useful and tried-and-true model, Porter’s Five Forces has come under fire for not adequately explaining strategic alliances. Adam Brandenburger and Barry Nalebuff, professors at the Yale School of Management, developed the concept of complementors as a sixth factor in the 1990s.
According to Brandenburger and Nalebuff’s paradigm, complementors market goods and services that work best when combined with those from rival companies. Apple, a maker of computers, and Intel, a chip manufacturer, might be viewed as complementors.
Your grasp of your company and its possibilities will likely be rounded up by using further modeling tools. The BCG matrix assists organizations in determining which products are most likely to profit from greater investment, and value chain analyses aid businesses in understanding where their strongest competitive advantage rests.