Porter’s 5 Competitive Forces: What They Are and Why They Matter
In 1979, one of the most influential and esteemed business tools was published: Porter’s 5 Competitive Forces. Harvard Business School professor Michael Porter gave the world a business and marketing model to analyze how industries reach profitability. Once you have a hold of each of these forces, you can use them within your strategy. After all, knowing your strengths and weaknesses can be invaluable when looking for long-term profitability.
What Are Porter’s 5 Competitive Forces?
Porter’s 5 Competitive Forces is a framework that businesses can use to analyze an industry’s competitive environment, determine how to gain a competitive advantage, and increase profitability.
Let’s take a deep dive into each of the forces at work…
1) Supplier Power
Hypothetically, how easy is it for you to switch to a new supplier? Would you be paying more or less? If you have other alternatives available, then you’re sitting okay. If you only have a few options, then you are at their mercy. If you need their help, they can charge more.
Think of it this way… If your suppliers have more influence on opening and closing the gates of supplies, costs, and time, you’re heavily dependent on that relationship.
Likewise, if one day your supplier decides he or she doesn’t want to do business with you or increases the cost of doing business, your organization will be significantly affected. Putting all your eggs in one basket is risky business, even with suppliers. So, here one may truly want to evaluate his or her supplier mix—identifying the who, what, where, when, and terms of suppliers. Then, identify the risks associated with the current supplier situation, alternatives to overcome or minimize the effect of those risks, shape supplier initiatives within operational strategy planning, implement, and monitor supplier power.
2) Buyer Power
Do your buyers have an easy time bringing your price down? If your industry is heavily impacted by consumer demand, and consumers can shift the prices of that demand, one must identify the risks that are associated with such buyer power. Certainly, one wants to provide a product or service at a price that the market responds to and is profitable.
However, if there is too much buyer power in terms of the prices of the products or services, there is the risk that you may experience significant peaks and valleys. Likewise, depending on your buyers’ purchasing power size, the buyers may dictate the terms to you and identify whether you can accept those terms. This is often the case with wholesalers and manufacturers that are trying to get their products on the shelves of big-box retailers.
Example: It is seen every day from airlines to supermarkets. If the consumers don’t want to pay a high price for a certain item, eventually it will go on sale.
3) Competitive Rivalry
Here, we look at every rival you have in your field. There are plenty of other opportunities for customers to use your rivals and not you if there is significant direct competition. So, one should become the expert in what products and services are offered within his or her firm, as well as by the competition.
You must know everything about your rival, including…
- Similarities
- Differences
- Features
- Prices
- Warranties
- Etc.
This will provide your management with the means to identify areas to capitalize on. Competition with companies can be a good thing because it gives you drive. That drive will push you to think differently, such as whether you may need to create a new product. Your differences are your advantage.
4) Threat of Substitution
Have you ever wanted to pay for a service, but it was too expensive or too much work? Chances are you found a different offer or did it yourself. This power is the possibility of customers switching out your product or service for themselves.
For example, if you’re a marketing consulting firm, and your prospective customer doesn’t want to pay for your services, he or she could outsource similar services to a discounted firm, software application, or some other platform in which he or she would receive comparable service or product.
This is an opportunity for management to evaluate alternatives, create unique features that aren’t easily replaceable, and build that value for customers to see the “why” of purchasing the product or service from your firm.
Example: If an airline ticket is too expensive, a consumer may choose to drive instead.
5) Threat of New Entry
Here, one evaluates how easy it is to start a business in this industry. If it is relatively easy, then there is a higher risk.
- Can your goods or services be easily replicated?
- Would new competitors be able to get to your level efficiently?
Organizations that can create proprietary systems and processes while managing accordingly can provide a greater barrier to prospective competition. However, for those that can’t, market penetration for the new entry is less of a threat to the prospective new entrant.
Why Porter’s 5 Competitive Forces Are Here to Stay
The marketing world is constantly changing, evolving, and running to keep up with everything. A lot of techniques and practices that marketers love to use get thrown out in a year. So, why has something like Porter’s 5 Competitive Forces stood the test of time?
Expert marketers agree that old-school core concepts are here to stay because these factors of the market haven’t changed. You will always have competition, suppliers, buyers, etc. That’s what makes this tool invaluable. It’s easy to understand, gives you practical advice, and is not going anywhere.
In all, Porter hits home the importance to evaluate objectively one’s organizational position. Specifically, looking at the risk associated with suppliers, buyers, current competition, substitution, and the threat of prospective competition. Oftentimes, management can get so caught up working within their business that they underestimate these 5 forces that shape organizational strategy and sustainability. So, take some time to visit these competitive forces and identify where you are today, where you would like to be, and what you can do to effectively shape your operational strategy dealing with these areas.
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