Porter’s Five Forces: is a framework that helps an organization understand the intensity of competition in an industry, and its attractiveness and profitability level.
Porter’s 5 forces are
- Competitive rivalry
- Threat of substitute products
- Bargaining power of buyers
- Threat of new entrants
- Bargaining power of suppliers
When to use it
- To identify and understand the forces in your industry that can affect your profitability
- To understand the competitiveness in your industry
- To assess your marketplace viability and strengths and weaknesses in your position
How to use it
Step 1: Start by gathering information on the five forces. The aspects you need to focus on are BOLD below.
Focusing on these aspects below you can determine how competitive and profitable the industry is.
- How many competitors do you have?
- who they are? Are they direct competitors?
- What are their strengths and weaknesses?
- What’s the quality of their products and services when compared to yours?
Determine the power suppliers have to increase their prices or provide low-quality material which in turn will affect your product or service. Focus on
- How many potential suppliers are in the market?
- How scarce are the material they provide?
- How expensive would it be to switch from one supplier to the other?
- Can you find substitute material? How costly are they?
How much power do your customers have over you? They have the ability to drive prices low and demand higher-quality products. Here you should focus on
- How many buyers are there?
- What’s the size of their orders?
- How powerful are they? Are they powerful enough to dictate terms to you?
- How much would it cost them to switch from you to another product?
Threat of new entrants
Determine how easy it is to enter and establish a business in the industry you are competing in. If an industry is profitable and only has few barriers to enter, new companies can easily establish themselves posing a threat to you. Focus on
- How easy it is for a new business to get established in your industry?
- How much would it cost?
- What are the rules and regulations? Legal barriers?
- Is it easy to get access to suppliers and distributors?
Threat of substitute products
Determine how easily your customers can find a substitute product. If there are substitutes that are cheaper and can be easily purchased, that may weaken your stance.
- How many substitutes are in the market?
- What’s their quality and price?
- How easily can your customers find them?
- What would it cost them to switch to a substitute?
Step 2: Once you have collected all the information, you can use Porter’s five forces template to display them. This will make it easier to analyze and communicate them to your team.
Step 3: Based on your analysis and conclusions, develop efficient strategies.
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