When it comes to being a business owner, one of the challenges you face is developing a strategic business plan that gives you an edge against your business competitors. However, whether you’re a new business owner or a seasoned professional, competitive strategies and tools can be challenging to come by. Luckily a standard and trusted business tool used by many can help identify the main factors of competition in your industry with ease. This tool is known as Porter’s Five Forces, and it is a respected method utilized by businesses across sectors worldwide. To learn more about this business tool, keep reading.
- Porter’s Five Forces are competitive rivalry within your industry, power of the supplier, Power of the buyer, the threat of substitute products or services, and new business within your industry.
- This tool can help you boost revenue, improve weaknesses, and prevent you from making bad business decisions.
- Harvard Business Professor Michael Porter developed Porter’s Five Forces in 1979.
What are Porter’s Five Forces?
Porter’s Five Forces is a powerful business strategy tool developed by Michael Porter, a Harvard Business School Professor, in 1979. As mentioned, this tool allows you to narrow down and identify the primary sources of competition your business faces. Therefore, once you have recognized these bases, you can boost your revenue, adjust any portion of your business plan, improve weaknesses in your company, and avoid making wrong decisions. Accordingly, Porter’s Five Forces are:
1. Competitive rivalry within your industry
This category allows you to evaluate the number of business competitors in your sector. Additionally, it also requires you to look at your competitors’ strengths, weaknesses, and strategies.
2. Power of the supplier
Furthermore, the next factor used in this tool requires you to evaluate your supplier options. The goal here is to determine how easily they can raise their prices. For example, if you have several suppliers to choose from instead of one or two, it will be easier for your business to change suppliers for a cheaper alternative without sacrificing the quality of the products you sell.
3. Power of the buyer
The third source identified by Porter’s Five Forces is the power of the buyer. With this factor, you will need to evaluate the number of potential buyers for your products and services. If you have a lower number of buyers with several suppliers, they have the power to choose more affordable solutions. As a result, this can significantly reduce market prices for your specific product or service. However, if you have numerous buyers with little competition, your business authority will increase.
4. The threat of substitute products or services
Moreover, the next factor influencing your business strategy is how easy it is for buyers to find a substitute product or service that you sell that is more valuable. This will ultimately determine your business authority and threaten your revenue.
5. The threat of new business within your industry
The last of Porter’s Five Forces is the threat of new competitors entering your industry. For example, if your business offers products and services that require little to no effort to reproduce, it is easier to place yourself as a competitive edge against other companies. As a result, your position within your industry can weaken over time. This is why it is essential to have strong protection on critical technologies and methods compared to other competitors.
How do you analyze porter’s five forces?
Furthermore, now that we know what Porter’s Five Forces are, take a closer look at how you can analyze these sources before formulating your business strategy with the following questions.
Competitive rivalry within your industry
- How many known competitors do you have in your industry?
- Who is your biggest market competitor?
- What is different between you and your competitors?
- How does the quality of your competitor’s products and services compare to your company?
- What would it cost your buyer to switch from your business to your competitor?
Power of the supplier
- How many supplies does your company rely on?
- What makes the product or service from your supplies unique?
- How many other supplies do you have in the industry?
- How do their prices compare to the supplier you are using right now?
- What would it cost for you to switch suppliers?
Power of the buyer
- How many buyers are in your industry?
- What are the order sizes you are receiving from your buyers?
- Is it possible for your buyers to switch to another business? If so, how much would this cost?
- What value does your product or service provider to your buyers? How vital is it to them?
The threat of substitute products or services
- What distinguishes your products or services from any substitutes?
- How many substitutes are available in your industry?
- What are the relative costs of switching to a substitute product from yours?
- How easy would it be for your buyer to switch?
- What products or services could you offer to substitute against your market competitors?
The threat of new business within your industry
- What barriers are in your industry, such as patents or business rights?
- How can you make your business scalable?
- How strict is the market regulated in your industry?
- Have you protected your business technologies?
- How much would it cost to enter your industry? How long would it take?
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Which of the forces is the strongest?
Furthermore, while Porter’s Five Forces identifies five sources to consider when designing your business strategy, one of the most important factors is the bargaining power of consumers. This is because modern consumers have significantly more power in the digital era than before. Additionally, modern consumers also expect more from businesses in terms of customer experience than ever before. As a result, they can easily shop around for alternatives to your products, leave positive or negative reviews that can affect sales, and choose whether they want to be loyal or not to you or your competitors.
Is the 5 forces model relevant in today’s business world?
Lastly, while Porter’s Five Forces has remained a popular business strategy tool for years, it has undergone some criticism in the new digital era. Mainly, experts believe that due to its outdated framework, the device cannot factor in technological advancements. Additionally, it is unable to adequately anticipate ever-changing market shifts that lay ahead that can cause instability. Thus, for businesses to remain relevant in their market, they must consistently stay on top of market trends remain resilient and aggressive when dealing with competitors. Nonetheless, Porter’s Five Forces is still a reliable tool that can help you in the beginning stages of your business strategy.