Every organization that functions in a specific environment is affected by several factors. These can be suppliers, buyer demands or the competition.
Michael E. Porter, Harvard professor and academic, is known for Porter’s Five Forces Model that analyzes the five permanent forces that can impact an organization’s profitability. These don’t account for factors like government policies or environmental changes that may be temporary.
According to Porter’s Five Forces Model, there are five forces that can strengthen or weaken your organization’s position in the market. These are industry competition, new entrants in the market, supplier power, buyer power and threat of substitutes. The Porter model aids in assessing an organization’s competitive environment. The biggest advantage of the Porter’s Five Forces Model is that it helps build a robust, sound and air-tight business strategy.
Read on to find out how you can use Porter’s 5 Forces Model to build a business strategy that helps you sail through turbulence.
What Is Porter’s 5 Forces Model?
Organizations have varying degrees of profitability, popularity and brand recall. Names like Apple, Google and Netflix have become far more popular than others. As per Michael Porter, this knowledge or awareness of an organization and its offerings depends on five forces.
The Five Forces Model is a business analysis tool to measure your organization’s competitiveness. Whether your business has a large number of competitors or if you’re offering a niche product affects your profitability in many ways.
If you want to assess your industry standing or position, you can use Porter’s Five Forces Model. You can create, modify and update your business strategy based on these five competitive forces. According to Porter, the purpose of understanding these five forces and to have knowledge of them offers the foundation you need to build a strategic action plan. In an article published in Harvard Business Review, Porter writes, “They highlight the critical strengths and weaknesses of the company, animate the positioning of the company in its industry, clarify the areas where strategic changes may yield the greatest payoff, and highlight the places where industry trends promise to hold the greatest significance as either opportunities or threats.”
Organizations have to react fast once they discover potential threats to their business model. Instagram launched Reels just as TikTok was making an exit from the Indian market. Similarly, OTT platforms gained traction during the pandemic, as Netflix was booming. The purpose of these actions is to restrict entry for new and substitute products or services. To stay on top of the game, businesses strategize based on trend analyses and research. A lot of what goes on in an organization is curated around the Five Forces Model. From brand strategy to product and engineering efforts, each aspect is put in place to sustain competition and increase profitability.
The Five Forces In The Porter Model
Each of the five forces defined by Porter are based on the underlying characteristics shared by industries. These may be economic or technical, and they shape the way you do business. The strength of these forces differs depending on the threat. For industries like publishing, the entry of e-books and e-book readers proved to be detrimental. So, for them the key forces are substitute products, buyer power and new entrants.
If you do an analysis to determine your key forces, you’ll recognize your threats early on. This makes it easier to strategize and prepare for challenges and setbacks that could hurt your finances.
1. Industry Competition
Every organization has competition in the industry within which they operate. Today, we have several apps delivering food and essential items across India. This doesn’t mean that you shouldn’t go into the business of app-based delivery. You just have to find that one thing that sets you apart. You have to assess the number of competitors, their product and service quality and your USP. Based on this assessment, you can determine prices, branding and offers to make sure you stand out. If the competition is slim, you’ll find it easier to survive in a healthier and robust environment. But if it’s large, you’ll have to use diverse pricing and marketing techniques to find your footing.
2. Supplier Power
In industries that operate with the help of third-party sellers and suppliers, it’s important to have knowledge about the number of suppliers, their pricing and operations. If you have several suppliers offering their products or services, you’ll likely get a better price range. Suppliers have the power to drive up the cost of goods used for your product or service. You have to assess whether you want multiple suppliers, and at what cost, or if you want to stick to a few. From pricing and cost to quality of the goods provided, each aspect has to be carefully considered.
3. Buyer Power
One of the five forces in Porter’s Five Forces Model is of course the power of the buyer or the customer. The customer’s buying power determines not only the credibility of your product or service but also your profitability. You have to gauge whether they can easily access or afford your offerings. If they can’t, you have to reorganize your operations, marketing and sales strategies. The more customers you have, the easier it is to modify and alter the selling process. But if it’s a quality service or good, you may have little flexibility as customers will drive the prices up or down with their buying power.
4. Substitution Threat
One of the most potent threats to your business is the threat of substitution. Substitutes are competitive forces in the Five Forces Model. For any business, substitute products or services that can upend their business model is a threat. For instance, if you’re in the restaurant business and someone opens a similar-themed restaurant right across from you, it’s bound to hamper your footfall. The more substitutes you have, the less your chances at profitability. At the same time, the fewer the substitutes, the more airtight and healthy your business environment. You’ll also have more power to upgrade your sales and marketing efforts.
5. New Entrants Threat
If it’s easy for new and other organizations and brands to enter your market or industry, it can be a threat to your business. New entrants can weaken an organization’s market standing and profitability. If there are barriers to entry in place, you’ll be in a better position to sustain competition. Each industry has certain barriers like pricing, technology and access to resources. If it’s easy to bypass these barriers, it may prove detrimental to your business. However, if it’s difficult to navigate these factors, competing brands may not be able to enter your market or industry so easily.
Michael Porter’s Five Forces Model is sound and helps organizations prioritize what they need to do to sustain competition. Business strategies can be built around whether one force is more potent than others. It offers a direction and the ability to create an actionable plan for the future. If you want your organization to surpass expectations, you’ll build a loyal customer base and gain popularity. Profitability is another major factor that’ll play a role in determining how you plan to work with the five forces.
Barriers To Entry
Porter explains six barriers to entry that drive these five competitive forces. If the barriers are high, entry will be difficult for competing brands and organizations and vice versa.
Here are the six barriers of entry as defined by Porter:
1. Economies Of Scale:
Scale of operations determines the ease of entry for newcomers. If they need a large workforce to enter a market, they may have to bear high costs. Research and marketing investment can also make a considerable impact.
2. Product Differentiation:
To compete with established brands, new brands have to invest heavily in branding and marketing to override customer loyalty. This can make a serious dent in their financial budgeting.
3. Capital Requirements:
Capital investment is also a major factor that keeps new competitors from entering a market. They have to incur significant costs to keep up with research and development efforts.
4. Cost Disadvantages:
Existing organizations and businesses have a cost advantage when it comes to technology, resources and government policies as part of their industry. Newcomers have to bear cost disadvantages to adopt many or most of these benefits.
5. Access To Distribution Channels:
When it comes to distribution channels, new brands have to make room for themselves in the wholesale and retail landscape. Most existing brands have contracts and associations with channels so it can be tough to carve a niche.
6. Government Policy:
Entry barriers by air, sea or land can affect trade. They can involve licensing requirements that deter newcomers from entering the market. Access to resources required for manufacturing can also impact entry.
Barriers to entry greatly impact the competitive forces that function in a business landscape. Planning around them and curating a business strategy requires a network of people. You have to reach out to others, foster multiparty decision making and expand your network.
Harappa’s Expanding Networks Course
Building a network to help and support your business needs is a great way to enter a new market or sustain competition. Porter’s 5 Forces Model teaches us what we need to be mindful of as we build a business. Harappa’s Expanding Networks course introduces frameworks like The Trust Equation and Types of Networks that will help you identify the right connections. Professional relationships are a must in the business landscape. You need trust-rich ties and collaboration to advance. Enroll today and kickstart your career progression!