I. Introduction
In this competitive age, businesses must be aware of their competition in the market and how they impact profit. Porter’s five forces model is one of the most popular analytical tools that most companies prefer to use to analyze industry competition. This model is essential as it helps them examine the factors that shape industry profitability—things that help businesses find their competitive edge in the market.
A. A brief overview of Porter’s Five Forces
Porter’s Five Forces analytical model was developed by Michael E. Porter in 1970. It is an influential analysis tool or framework that helps businesses assess the competitive force of their industry. Porter’s five forces model details five essential forces within the industry that determine the profitability and attractiveness of an industry. So, if you are running a business or studying one, this article is for you.
B. The Importance of the model in strategic business analysis
Porter’s five forces model has a huge significance in strategic business analysis. This analytical framework comprises five essential forces of the industry that collectively influence the profitability of a particular industry. As a result, it strengthens strategic business analysis and helps to identify a profitable position in the market/industry. Today almost every business across industries utilizes Porter’s five forces framework.
II. Five Forces explained
In Porter’s five forces model, Michael E. Porter has discussed five industry forces that impact the profitability of the industry. Here we will learn about them in detail.
A. Bargaining power of suppliers
The bargaining power of suppliers is the first and one of the most crucial forces of Porter’s five forces model. According to this framework, the bargaining power of suppliers is the industry force that influences the industry’s profitability.
1. Definition and significance
As the term suggests, the bargaining power of suppliers refers to the suppliers’ power to impact the raw material supply and quality of the material used for production. This naturally impacts the profitability of your business. That is why the bargaining power of suppliers holds a strong influence over the profitability of the industry.
2. Factors influencing supplier power
There are certain factors that primarily influence suppliers’ bargaining decisions. The factors may include scarcity of the raw material, imbalanced supply chain, limited access to the material, higher transportation cost, and limited number of suppliers in the industry.
3. Real-world examples
Volkswagen Group has a global presence. As a result, they have suppliers spread across the world and do not have high bargaining power over suppliers. In addition, they also have 1-2 backup suppliers that help them limit the power of suppliers’ bargaining.
B. Bargaining power of buyers
Another force in Porter’s five forces model is the bargaining power of buyers. According to Porter, like the suppliers, buyers also have a strong influence over the industry’s profitability.
1. Understanding buyer power
To understand how buyers influence the business profitability, you have to understand the power of buyers. Buyers hold a special power as they directly determine the demand for the product or service a business offers.
2. How buyers influence businesses
Buyers can significantly impact the profitability of a business by collectively increasing or reducing the demand for the product/service of the company in the market. For certain reasons, if the buyer group shows interest in buying a product/service it will result in increased sales of that particular business or vice versa. The simple formula of buyer power is:
Bargaining leverage + Price sensitivity = Buyer power
3. Case studies illustrating buyer power dynamics
In the case of Indian airlines, the direct access of buyers to fare schedules and tickets only and their increased demand for low-cost carriers resulted in an increased number of low-cost flights.
C. Threat of new entrants
The threat of new entrants is also an important force mentioned in Porter’s five forces model. Here we will discuss the force in detail.
1. Definition and impact on industries
The threat of new entrants can impact the industry’s profitability. The constant threat of new entries in the market puts pressure on the existing players and forces them to keep their prices low to support their sales.
2. Barriers to entry
When a new company enters the market it comes with new industrial resources and production capacity. However, the market is shaped by the existing enterprises. So, the new entry has to be fierce to disturb the status quo. Thus, in response, existing businesses create high barriers for new entrants.
3. Examining successful and failed market entries
The Bisleri company has become synonymous with water in India. However, when the brand tried to introduce its beverage range including Spice, Limonata and Colada, it failed to grab the attention of the local audiences. On the other hand, L’Oréal entered the Indian market with the Garnier Ultra Doux range of shampoos in 1992, and to date, it is a leading name in its category industry.
D. Threat of substitutes
In Porter’s five forces model, the threat of substitutes is also a driving force in the industry. The threat of substitute refers to the threat that the service provider or product the business offers will be substituted by the user.
1. Identifying substitute products or services
Every business faces threats of substitutes in the industry that have the potential to take over and impact their performance and profitability. When new businesses enter the industry or a leading company faces too much competition or threats of substitution in their business.
2. Evaluating the impact on businesses
When a business faces too many competitors in business who offer substitutes for their products/services, they face a constant threat of losing their audience. As a result, they face immense pressure to maintain impeccably high standards and quality along with affordable pricing. That’s the only way to maintain a positive presence in the market.
3. Examples of industries facing substitute threats
Nowadays, various industries face the threat of substitutes. For example, the retail industry in India facing substitute threats from e-commerce and online selling platforms. Other industries facing the threat of substitutes include eateries and the traditional entertainment industry.
E. Competitive rivalry
The last force mentioned in Porter’s five forces model is competitive rivalry. It is also an important force that influences industry profitability.
1. Definition and its role in market competition
Competitive rivalry is the measurement of the extent of competition among competitors or existing companies. The intense or strong rivalry between two or more competitors leads to limited profit, price cutting, and increased expenses in product improvement and advertising campaigns.
2. Analyzing factors intensifying rivalry
According to Porter’s five forces framework, several factors intensify competitive rivalry. These include costs, innovation, reduced price, economic growth, and differentiation.
3. Famous rivalries and their outcomes
Across the world and industries, you can witness famous rivalries. From Adidas vs. Puma, and Hyundai vs. Maruti Suzuki to Bru vs. Nescafe, and McDonald’s vs. Burger King. Most of this rivalry leads to increased advertisement campaigns, innovation, and marketing efforts.
III. Applying Porter’s Five Forces: Real-world examples
Porter’s five forces model is widely used for business analysis. Here are some real-world examples of applying Porter’s five forces framework.
A. Industry A: Applying the model for strategic insights
Porter’s five forces framework or model analyzes the five forces of the industry to bring helpful strategic insights for business strategy planning.
1. Analysis of supplier and buyer power
Zomato and Swiggy, both online food delivery companies, leverage suppliers’ and buyers’ power. They expand their supplier network and service range to maintain a competitive edge in the market.
2. Evaluating the threat of new entrants and substitutes
The Coca-Cola Company in India has smoothly managed the threat of entrants as well as the threat of substitutes. It has done this by strengthening its network, economic scale and brand recognition to beat the competitors.
3. Understanding competitive rivalry
When it comes to competitive rivalry, Amazon Music and Apple Music have made Spotify rethink their marketing strategy. The platform quickly lost users after these two brands made their aggressive marketing moves.
Industry B: Lessons learned from effective use of the model
Successful use of Porter’s five forces model can offer valuable insights into various aspects of the broader market scenario. It is not only a competitive analysis framework. It can offer insights for market risk assessment, industry analysis, and much more.
1. Strategic decisions based on the Five Forces analysis
Porter’s five forces framework can be beneficial for offering insights into strategic decision-making. It can help an organization or business determine:
● Whether to enter a certain market or not
● Whether to launch a new product (service) or not
● How to position for success
● Which industries one should choose to compete in
2. Long-term impact on industry positioning
Porter’s five forces model is a qualitative competitive market analysis framework. Below are the ways Porter’s five forces analysis can impact an organization’s future industry positioning. It can help with:
● Understanding the long-term profit potential of an industry or the organization
● Evaluating long-term sustainability
● Learning about future market changes
● Help in competitive positioning
● Eliminating risks for strengthening market position
IV. Critiques and limitations
A. Addressing criticisms of Porter’s Five Forces
Porter’s five forces model offers various benefits. However, the model has also garnered criticism from many field experts. Here are some criticisms that this model faces:
● Limited scope of analysis
● Static analysis
● Lack of implementation guidance
● Neglect of complementary products and network effects
● Quantification challenges as this model primarily focuses on quality
B. Instances where the model may fall short
Porter’s five forces model is a highly regarded model for competitive analysis. But it is not always the best option for every business. Below are the instances where the application of the model may not provide the best results.
● A varied portfolio of services and products: Porter’s five forces analysis can be time-consuming if your company has a varied portfolio of services and products across various industries.
● Software and other digital industries: The forces of analysis in Porter’s model may not be very relevant for the fast-moving digital space.
C. Alternative strategic models for comprehensive analysis
Porter’s five forces is a beneficial model. However alternative frameworks can add extra perspective and detail to help the formulation of a strategy. Here are some popular alternatives to this model.
● SWOT analysis
● BCG Matrix
● PESTEL analysis
● Balanced scorecard
● Blue ocean strategy
● GE-McKinsey Matrix
● Resource-Based View (RBV)
● Ansoff Matrix
V. Conclusion
Porter’s five forces model is one of the widely used and accepted analytical tools in business strategy planning. Most leading businesses in current times use this framework for assessing the industry’s profitability and attractiveness. This framework or model helps businesses find their competitive position in the market by collectively analyzing the forces or factors that influence industry profitability.
A. Recap of Porter’s Five Forces
Porter’s five forces model is an analytical tool for industry profitability analysis. The framework was established or developed by Michael. E Porter. In this model, Porter mentioned five forces—competitive rivalry, bargaining power of suppliers, power of buyers, threats of new entrants, and threats of substitutes.
B. Encouraging businesses to embrace strategic analysis
Porter’s five forces model is a highly effective industry profitability and attractiveness analysis tool. It helps to assess industry profitability by analyzing five forces of the market. It can be a great tool to analyze the competitive position in the market and develop successful business strategies.
C. Final thoughts on leveraging the model for sustainable success
Porter’s five forces model is a widely used business analysis framework that helps businesses analyze industry profitability to find their competitive edge. However, like any other analytical model, it also contains certain drawbacks. However proper and well-informed incorporation of this framework can assure sustained success in business.
FAQs
Q. What is Porter’s five forces diagram?
Porter’s five forces diagram or model was first developed by Michael Porter, a professor at Harvard Business School in 1979. The diagram has competitive rivalry at the center. Supplier power and buyer power are on the two sides of the center. The threat of new entry above and the threat of substitution below is the center of competitive rivalry.
Q. How to do Porter’s five forces analysis?
Porter’s five forces help to analyze the competitive forces in an industry. To use this analysis, one can follow the below steps:
● Evaluating the strength of current market competitors
● Calculating the bargaining power of suppliers
● Evaluating the bargaining power of buyers
● Identify new entrants and threats to the current market
● Evaluating the threat of substitution in the market
● Use the results of these evaluations for organization strategy building
Q. What is Porter’s five forces exercise?
Porter’s five forces consist of competitive rivalry, buyer power, supplier power, threat of new entrants, and threat of substitution. This model encourages businesses to consider the broader market environment as well as competitors when developing or assessing a strategy.
Q. What’s the difference between Porter’s 5 Forces and SWOT analysis?
Analysis of Porter’s five forces helps to define and explore an organization’s marketing strategy. Porter’s five forces model examines how external market forces impact an organization’s strategy and market position at present and in the future. On the other hand, SWOT offers an analysis of a company’s internal condition and current market position.
