Porter Five Force Strategy
Porter Five Force Strategy
Porter’s 5 forces always inspires strategic experts while doing planning and strategizing for their businesses. You need to shape the strategy or to opt for new avenues or explore the potential and threats of existing ongoing market dynamics, the Porter Five Forces is the model to assist you in designing the strategy.
Let’s have a look at these Five Forces
Interestingly in the middle you find the rivalry amongst existing competitors, so all your competitors including yourself focuses in this middle section of the model.
The rivalry of these competitors are being influenced by the four forces surrounding them. Each of this competitor has to deal with a certain threat or a certain power, the rivalry eventually results in drafting strategy to tackle the situation.
Ironic market factors for Rivalry:
- Growth rate of the industry
- The ratio of cost structure to the value added
- Degree of output differences among competitors
- Impact of brand and its conversion to sales
- Switching cost
- Information flow and complexity
- Diversity of competing businesses and exit barriers
Threats of New Entrants
Let’s first start with the threat of new entrants, every business has a certain threat or may be less of a threat of entrants who want to enter the market which you are in.
You can imagine that entrance from overseas such like China enter a market and try to also have a small piece of the pie through introducing similar products where they want to sell their products maybe the products that are similar to the products that you already sell.
Ironic market factors for new Entrants:
- Economies of scale
- Brand identity
- Switching costs for the customers
- Capital intensive nature of the industry
- Access to distribution channels
- Absolute cost advantages
- Government legislation surrounding new entrants and potential fall outs
Another threat is a threat of the substitute products you can imagine that there are products kind of similar to your products or which are a perfect substitute for the products that you already sell for instance if you sell mopeds a substitute could be an electrical bicycle this could be a threat to your products and perhaps you sell less products if customers decide rather buying an electrical bike.
Ironic market factors for Substitute Products:
- Relative price advantage of the substitutes
- Functional performance advantage of the substitute
- Switching costs of the customer for moving to the substitute
- Customer’s propensity to substitute
Bargaining power of suppliers
The another important element is the bargaining power of suppliers, let’s take an example in which you want to manufacture a product so scenario in which there are a lot of suppliers then you have the margin that you can pick which supplier you like to do business with, whereas in case there are not a lot of suppliers and you only can choose two or three you can imagine that the supplier can set their own prices or their volumes or can and make a choice not to supply you with certain products against a certain price.
Ironic market factors related to Bargaining power of Supplier:
- Switching cost of the suppliers
- Supplier’s industry concentration
- Suppliers power to negotiate
Bargaining power of buyers
Another power game is the bargaining power of buyers, for instance if you have a really transparent market and the buyers exactly know what kind of price they wants to pay or they should paid for your product then you don’t have a lot of power otherwise the buyers can choose to buy the product somewhere else if the price is not right. But if your product is really special and really exclusive then probably your buyers won’t have a lot of option.
- Buyer’s availability versus Industry’s Concentration or Industry output
- Customer’s switching cost
- Price sensitivity
- Degree of product Variety
Steps How to use Porter 5 Force Model
Start writing down the as-is situation and it’s kind of a dynamic model as you can also create multiple scenario on the bases of the stats of your consumers and your competitors and you probably can kind of expel what the market will do in the near future. At every power you have or every threat that you face you write the situation now and how it will develop in the nearby future.
If you have the feeling that certain developing countries are really doing great work in developing technology etc then as if the situation now is kind of a threat you can imagine that the situation in the near future will result in higher threat level.
Similarly bargaining power of entrants needs to be evaluated and so for every force that you mention and for every force that you examine, after researching you always first write down what the case is and why you think due to your analysis that the competition will develop like this. You also write down your future view your kind of scenario about how this will develop.
There are entry barriers and exit barriers and these really concern the rivalry because at this moment if you are in a situation you are in market where you are in business of manufacturing and delivering products the situation is that it’s not so easy to step out take for instance the car manufacturer even in case they went bankrupt but as per legislation they still have an obligation to keep producing spare parts for all their cars actually have to do this for number of years so it’s not so easy to step out of this market the same goes for the barrier to enter this is really important for the new entrants.
Nowadays the electrical car business is a really attractive market so you can imagine that the threat for new entrants is quite high and similarly we read that the barrier to exit is also high so these are two extra forces you can name them which also give this model extra dimension.
So to analyse how attractive is your market write down per force what’s the situation, the Porter Five Forces model is invented to gauge the market attractiveness of the business i-e how attractive is your pie among the competitors and is use to analyse competitive environment of the market.