What are Porter’s five forces and how their analysis helps to understand our market position

Porter’s 5 forces model is a very useful tool to include in your marketing plan that provides a framework for strategic reflection to verify the viability and profitability of a sector or project in the long term.

At a time of crisis, market changes, entry of new competitors or launch of new projects, it is essential to make a market analysis and the tools that can be applied to the new challenges. That is why in this post we want to tell you a little more about Porter’s 5 forces and how to apply them in your business.

What are Porter’s 5 forces

Let’s start at the beginning. Porter’s 5 forces were created by the engineer and Harvard Business School professor Michael Porter, and exposed in his first book “Competitive Strategy”.

This is a model that analyzes the level of competition within a sector or industry in order to develop a business strategy based on 5 forces:

• The power of the customer
• The power of the supplier
• New incoming competitors
• The threat posed by substitute products
• The nature of rivalry.

The first two correspond to vertical competition forces, while the other three are horizontal competition forces. With this management tool, companies are able to analyze and measure their resources. Based on these forces, they will be able to establish the optimal conditions for planning ideal strategies to enhance their opportunities or strengths in the face of threats and weaknesses.

Although this model was developed in 1979, it is still very relevant and today, each executive or brand can adapt it to their specific situation and circumstances.

The bargaining power of customers

According to Porter’s perspective, the more organized consumers are, the more demands they can impose in terms of prices, quality and service, which can lead to lower profit margins. In addition to this, the customer may choose another service or product from the competition, a situation that becomes even more visible when there are several potential suppliers.

For this, the ideal would be to increase investment in marketing, create a differentiating value offer, improve sales channels, create a higher quality product or reduce its price.

The bargaining power of suppliers

At the other extreme, the suppliers we depend on can become a threat if they have some kind of market or industry monopoly, if we face high switching costs, or if they enter into direct competition with us.

If we do not want to depend on a single supplier, we need to increase our portfolio, build long-term alliances and prepare our own raw materials.

The threat of new entrants

The easier it is for a competitor to overcome industry obstacles (applicable regulations, distribution channels, costs, etc.), the greater the threat to our own company, because they can offer the same products as we do and take our market share.

To preserve market share it is important to achieve real product differentiation, make capital investments to innovate and create access to distribution channels through which the customer can easily reach the final product.

The threat of new substitute products

When there are products in a market with more advanced technology or at a lower price that can replace ours, our profitability can be affected.

To stay one step ahead, it is necessary to pay attention to new developments in the industry and the influence they can have on the organization.

Rivalry among competitors

This item is the result of the previous four and is the one that provides us with the necessary information to establish market positioning strategies. Rivalry among competitors can increase if they are well positioned or have fixed costs.

A company’s competitiveness can be reduced the more companies with similar products or services there are in a market. In other words, the more competitors there are, the less of a pie each one has.

Five steps to apply Porter’s forces

1. We must make an estimate of the number of customers we have and how easy it is to attract more without lowering quality. In addition, we must analyze the level of satisfaction of our customers and if they are not satisfied, how easy it would be for them to switch to the competition.
2. Let’s ask ourselves, how many suppliers do we need, would it be necessary or feasible to change them, these two questions will give us clues as to how much power suppliers have over us.
3. Let’s make a list of how difficult it is to enter the industry in which we operate and what is our differentiating factor with respect to the competition.
4. We need to pay attention to the trends in our industry and whether they pose a threat to our business.
5. Knowing our competitors, their characteristics, market shares and strategies, we can know how much power they have.

Examples

To better understand the exercise, let’s look at two examples of well-known companies.

Starbucks

• Customer power: moderate, because although there are cheaper options, customers pay for the experience.
• Supplier power: low, because the brand avoids monopoly by buying from different suppliers.
• Threat of new competitors: high, because every day there are more companies with similar experiences.
• Threat of new substitute products: high, its products can be easily replicated and substituted.
• Rivalry among competitors: Starbucks has a very good position in the market, but should not underestimate similar brands.

Netflix

• Customer power: low, because the consumer has no power to decide on prices, since all streaming platforms have similar costs.
• Power of suppliers: high, because there are few suppliers and the Internet abounds with all types of content.
• Threat of new competitors: low, because a large amount of capital is required to create a streaming platform, without taking into account the preferences of consumers who already have Netflix in their top of mind.
• Threat of substitute products: moderate, because Netflix has similar prices to the competition, but a decisive point could be the content catalog.
• Rivalry among competitors: there is a real war among streaming platforms and many want the same position.

Photo: GPT4