Porter’s Five Forces model represent the challenges and potential threats of any company in a constantly changing environment. It is a strategic monitoring tool. Have a look how it works …
Who is Michael Porter ?
Michael Eugene Porter, one of the best economists of all time, his strong points are economics and management. He was born in North America in 1947 and is the creator of Porter’s 5 forces.
Today, Porter is a famed professor at Harvard, where he teaches the method he developed through business marketing strategy.
Thanks to his contributions to the business world, today we know the strategic management through which a series of advantages are developed for any business to be competitive.
What is Porter’s Five Forces model
Porter’s Five Forces model is a market analysis technique and a strategic analysis tool that takes into account the five dimensions on which the company can act to optimize its competitive advantage :
- competition from competitors;
- the threat of new entrants;
- the threat of substitute products;
- the bargaining power of customers;
- the bargaining power of suppliers;
It is used for strategic analysis and to identify areas for innovation.
Why use Porter’s Forces model?
According to Porter, if you don’t have a perfectly elaborated plan, you can’t survive in the business world in any way; which makes the development of a competent strategy not only a survival mechanism but also gives you access to an important position within a company and get closer to achieving everything you dreamed of.
The objective of this matrix is to analyse the company’s competitive environment before anticipating developments that would jeopardise its competitive advantages and guide its investment and innovation choices. The five forces represent this competitive environment.
This tool makes it possible to identify and implement development strategies by taking into account all market opportunities and threats.
This tool is used by marketing managers who have strategic intelligence and innovation objectives. It is well suited for industrial sectors where there are many players, as it analyses all the key points of the company’s competitive environment. It is also relevant in the event of the potential arrival of new entrants, in the event of a technological breakthrough, in the event of a merger or acquisition, whenever a major change has an impact on the company.
How to use Porter’s Forces model?
After analyzing each of the five forces, check whether the impact individually is low, medium or high, and then consider the situation as a whole to determine if there is a danger to the company.
Propose the orientations to be taken in terms of strategic monitoring and innovation.
Methodology and advice
The competitive environment described by these five forces goes well beyond competition between suppliers and broadens the analysis.
Porter’s Five Forces model represent the most common threats encountered:
The threat of new market entrants
All the means used by competitors make it more difficult for a new company to enter the market :
- Entry barriers, cultural barriers.
- Initial investments required, entrance tickets.
- Patents already in place.
- Standards, protectionist measures.
- Market size, image of the industry and established companies….
The bargaining power of suppliers
The ability of suppliers to impose their conditions on a contract, in terms of cost, quality or time, has a direct impact on the flexibility and profitability of the companies involved in it :
- Number of suppliers, cost of changing suppliers.
- Importance of the brand (strong brand).
- Product differentiation.
- Presence of substitutes and their differences….
The negotiating power of customers
The main influence of customers on a market is manifested through their ability to negotiate, their influence on the price and conditions of sale (payment terms, associated services) determines the profitability of the market :
- Level of customer concentration and size of customer companies.
- Number of clients.
- Customer brand image.
- Product differentiation (or standardization).
- Number of substitutes….
Substitution products are not part of the market, but represent an alternative to the offer which can be very attractive…
the rivalry of current competitors: concentration, diversity of competition and the balance of power between companies can be quickly reversed.
- Ability of buyers to change suppliers and products, resulting in cost.
- Volume impact on the market (new product, increase in the overall quantity sold to satisfy a need even if the product is very different).
The rivalry of current competitors
- Sector: strategic; market attractiveness.
- Number of competitors.
- Market growth.
- Possibility of achieving economies of scale.
- Product differentiation….
Once the actors of the matrix of the Porter’s 5 forces have been determined, it is necessary to prioritize the intensity of each of the forces that apply to the company’s economic environment. From this reasoning will flow the Key Success Factors. They correspond to strategic actions that, once implemented, give the company a competitive advantage.
Advantages of Porter’s Forces model?
The matrix allows an in-depth analysis of its competitive position.
It allows you to be proactive in your market and to anticipate, especially with regard to substitutes.
Easy to implement technique and structured approach.
Strategy Development by Porter
It begins by developing the vision of the company, then establishing the necessary strategy to fulfill the vision of the company. It must be taken into account from quantitative and qualitative factors to the most abstract such as power and hierarchy within a company.
What does Porter take into account in these cases?
The whole vision must be focused on the future, which makes a company begin to describe itself and know what it wants to achieve. The definition of the mission must contemplate all the values of the company.
It is one of the most important things and that is why it goes in first place, you must know what the mission is through the raison d’être of the company. It must also be independent.
Through values, you tell others what your priorities are and what the most important points of your company are. At this point, you must emphasize what makes your company unique and makes it stand out from the rest. Answer the question: What is important for my company?
It’s only after you’ve defined these three concepts that you can begin to formulate a strategy, according to Porter. Having these points already gives you a competitive advantage in the business world, because it allows you to direct efforts and always start with an end in mind.
Ways to achieve competitive advantages in the market
Cost leadership must be taken into account
At this point you must know the cost offered by all companies that provide the same service as you and offer the lowest price you can.
This means that any company can charge less for its services and thus attract a larger number of people. The expert Porter tells us that it is much easier when working with a large volume economy at low costs.
You have to get customers or people who know about your company have a different concept of it. Thanks to differentiation, you can achieve a personalized concept in the creation of the image of the company. You must have a differentiation that attracts customers almost completely and that distinguishes you from any other company in the market.
The business approach
Here you must take into account what are the bases of the company, since you must focus all the energy in the sale of a single product instead of trying to sell several. You can distinguish companies using this point because they take advantage of niches in the market, i.e. they offer products or services in an unsaturated market, since you are less likely to be successful if you sell something that everyone sells.