Industry Analysis And Competition – Porter’s Five Forces
Seema is the CEO of a fintech startup that’s working in an extremely competitive industry. Despite a unique vision, a…
September 6, 2021 | 4 mins read
Seema is the CEO of a fintech startup that’s working in an extremely competitive industry. Despite a unique vision, a diligent team and excellent work ethics, Seema struggles to achieve any major breakthroughs in the first three years of running her startup.
But things begin to change when she hires a strategist, Divya. Divya is able to detect what’s wrong with Seema’s organization within two weeks. The startup hasn’t taken off because it doesn’t have an industry analysis to work with. It has no meaningful knowledge of the competition it faces and is unable to figure out the patterns of investment in its industry.
Divya introduces Seema and her team to the concept of industry analysis and revamps the organization’s work culture and objectives. A year later, Seema’s team receives a ‘best-performing startup’ award and is firmly on its way to greater success.
Industry analysis, also known as Porter’s five forces analysis, is a useful tool for business strategies that looks at the attractiveness and competitiveness of various industries. It’s based on the central observation that profit margins vary between industries, which can be explained by understanding and analyzing industry forces.
Porter’s five forces industry analysis was created by Michael E. Porter in his article, “How Competitive Forces Shape Strategy”, published in the Harvard Business Review in 1979. Decades later, Porter’s industry analysis is still the benchmark for businesses to assess their competitive positions in an industry and use that assessment as a building block for their respective strategies.
Industry competition has only become more intense with time. With the latest technologies and business strategies hitting the market, it’s harder than ever for industries to achieve sustained success. The organizations that have stood out have usually managed to do so on the basis of strong industry analysis, the importance of which is outlined below:
The next section will give you a clear idea of how Porter’s five forces are categorized and analyzed as part of industry and competition analysis:
If there’s an increase in industry competition, profitability generally begins to decrease. Businesses are compelled to spend more in order to maintain and improve market share. Competition can take place in the form of pricing, services and product innovation. As a pattern, the more rivalry there’s among existing competitors, the less attractive the industry will be for potential investors.
Profitable industries naturally attract new entrants. With an increase in the number of entrants in an industry, industry competition shoots up and profitability per business tends to dip. This is why high barriers to entry are imposed for industries that are the most profitable as well as the most attractive for investors. Barriers to entry for new businesses can range from legal to structural to logistical, including complicated government regulations and intellectual property rights and major capital requirements.
Industries whose products or services are exclusive, or at least don’t have direct substitutes, are the most profitable and appealing for investors. The threat of substitute products or services naturally creates limits on the price that a business can charge. As a result, industry profitability takes a hit when there are many substitutes available in the market.
When industries consist of limited suppliers, the bargaining power is wielded by the suppliers instead of the industry participants or the consumers. This shift helps suppliers increase their profitability through a number of industry forces, such as increasing prices, limiting the quality of products or services and transferring costs from themselves to the consumers. In the long run, however, industries that rely on bargaining power of suppliers end up being less profitable and less attractive for investors.
When there are a limited number of buyers, the bargaining power rests with the buyers instead of the suppliers. Buyers can force prices down or demand better quality of products and services. This means less wiggle room for suppliers and less profitability and investment for the industries involved.
Industry and competitive analysis is among the hardest and most demanding requirements in any sector. But done right, it can also be the most rewarding. Harappa’s Expanding Networks course will equip you with all the skills you need to carry out industry analysis for your organization. With collaboration skills as your workplace superpower, you will learn how to build authentic, diverse and mutually beneficial professional relationships that go a long way in helping you understand an industry better. Guided by a world-class faculty and several exciting frameworks, you will be able to sustain and utilize networks like never before. Register for the Expanding Networks course right away and get one step closer to becoming the perfect industry analyst.
Explore Harappa Diaries to learn more about topics such as Meaning of Michael Porter’s Five Forces Model, Example Of Porters Five Forces, Explore Threat Of Substitutes Example and How To Motivate Employees to build strong professional networks.