Every business faces competition at some point in their lives. While competition will mostly always present as a threat or challenge to any business, it also throws up certain opportunities that can be exploited. Porter's five forces seek to proffer strategies that businesses can design in response to the competitive forces that affect them. This article discusses Porter's five forces as a management framework in this respect.
What is it?
Porter's Five Forces is a strategic planning model that recognizes and examines five competitive forces that define every industry or business. The aim is to develop a market strategy that manages the challenges and opportunities presented by these forces to create profit for the business. This is only after carefully understanding the forces and devising means to align them in your favor. These five forces are briefly discussed below.
1. Competition in the Industry
This refers to the size, capacity, and influence of the competition. It considers the effect that rival businesses have on your business's growth, pricing, and market strategy and how you can respond to their impact.
2. Power of New Entrants Into an Industry
The influence of new entrants in your market is closely related to competition. These new entrants could significantly threaten your company's market share. Hence, you must make plans to assert your products/services over them.
3. Power of Suppliers
Suppliers can either be a key driver in your company's growth pursuit or a cog in its wheels. The quality, availability, and pricing of your supplies and the presence of alternative suppliers are crucial to your business.
4. Power of Customers
The saying "Customer is king" holds true, based on the ultimate power they wield over any business. Customers can drive prices, sales, and profit, influence key product design decisions, and shape a company's overall business strategy.
5. Threat of Substitutes
The threat that a substitute product poses is closely related to the quality, utility, pricing, and general value that this product represents. The presence or absence of a substitute product for your product can affect the profit you make.
When do we use it?
Porter's five forces as a management framework are used by organizations that seek to get the best out of their resources to deliver an appealing and satisfactory utility. Other notable use cases include decision-making on the following subjects.
Market entry: Porter's five forces framework can help you decide on the best time to launch your products and what marketing strategy is the best fit for them. You can design it to analyze performance data from similar product entries and build from the lessons learned.
Product pricing: It can also help you decide on the best way to price your products and when is the best time to review the prices. You can use price data from competitor brands to work out a price ceiling.
Target audience: Porter's five forces can help you decide on what market segment should be targeted. You can study and define your customer and competitor hotspots and design your marketing campaign with the findings.
Supply Sourcing: By analyzing and understanding the role that your suppliers play in the growth of your business, you can make better decisions.
What business questions is it helping us to answer?
Porter's five forces help organizations answer questions about the interests and behavior of suppliers, customers, and competitors in a business environment. They include the following:
Competition
How many competitors does my business have? How do my products compare to them in terms of pricing and quality, and what can I do to measure up to them? Are there threats of a new entrant or a substitute product to be wary of?
Suppliers
What power do suppliers wield over my business? How does the cost of their supplies affect my earnings, and are there alternative suppliers to patronize? Are the supplies favorable in terms of their quality and pricing?
Customers
How many customers can I boast of, and how loyal is my customer base? Do I have the liberty to adjust prices, and how will the customers react to it? What does customer feedback say about my product/service, and what are the appropriate responses to any issues raised?
How do we use it?
To effectively use Porter's five forces, you must understand what they all represent and the impact they have on your business. You'll have to collect information about what each force means to your company and how they can be properly managed. You'll also need to satisfactorily answer the answers previously raised in this article and create a strategy around the answers. This should leave you with a means to manipulate these forces to your company's advantage in the market.
Practical example
Porter's five forces analysis of a hearing aid-producing company presents us with a list of 5 strong competitor brands and a growing interest in its novel technology. The company boasts a loyal, albeit limited, customer base due to its premium pricing and high-grade products.
It is mostly troubled by the threat of its chip suppliers hiking their prices. Another significant threat is the increasing presence of rival companies selling similar products and other assisted hearing alternatives. However, it decides to opt for other suppliers with more favorable prices while reviewing its product prices. It also resolves to embark on a more aggressive marketing campaign.
Advantages
It helps businesses track the level of competition in the industry they belong to.
It helps them understand the strengths and weaknesses of their enterprise and how they can exploit and manage them respectively.
It provides a framework for the design of a company's corporate business strategy, vision, or operational style.
It throws up a lot of data that'll prove useful for making crucial business decisions and helping companies understand their market position.
It provides a resource that can help create expansion opportunities for businesses.
Disadvantages
It is not exactly suited for long-term planning purposes. Its recommendations are limited by certain market dynamics that sway consumer and competitor interests.
It places each representative company in a singular industry. It does not effectively consider the fact that a company or organization might have interests that cut across multiple industry lines.
It does not account for the role of certain crucial external business risk factors. These factors—government policies, legal challenges, natural disasters, and financing challenges can influence the mood of your customers, suppliers, and competitors.
It may be difficult to adopt for large companies. This is mostly due to the variety of market sectors and product portfolios they deal in.
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