Analyzing the Competition with Porter's Five Forces

Understanding Porter's Five Forces · 1. Competitive rivalry · 2. The bargaining power of suppliers · 3. The bargaining power of customers · 4. The threat of new ... BusinessNewsDailyreceivescompensationfromsomeofthecompanieslistedonthispage.AdvertisingDisclosureHome>LeadYourTeam>StrategyUnderstandingPorter‘sFiveForcesExampleofPorter’sFiveForcesStrategiesforsuccessCostleadershipDifferentiationFocusAlternativestoPorter’sFiveForcesHowPorter’sFiveForcesCanHelpSmallBusinessesAnalyzetheCompetitionMarciMartinBusinessNewsDailyContributingWriterUpdatedJun29,2022Porter'sFiveForcesofferbusinessesawaytoanalyzeandoutmaneuvertheircompetitorsinthemarketplace.Knowingwhoyourcompetitionisandhowtheirproducts,services,andmarketingstrategiesaffectyouiscriticaltoyoursurvival.WhetheryouareaFortune500companyorasmall,localbusiness,competitionhasadirectinfluenceonyoursuccess.Onewaytoanalyzeyourcompetition–andunderstandyourstandinginyourindustry–isusingPorter’sFiveForcesmodel.OriginallydevelopedbyHarvardBusinessSchool’sMichaelE.Porterin1979,thefiveforcesmodellooksatfivespecificfactorsthatdeterminewhetherornotabusinesscanbeprofitableinrelationtootherbusinessesintheindustry.UsingPorter’sFiveForcesinconjunctionwithaSWOTanalysiswillhelpyouunderstandwhereyourcompanyorbusinessfitsintheindustrylandscape.Porter’sFiveForcesisconsideredamacrotoolinbusinessanalytics–itlooksattheindustry’seconomyasawhole,whileaSWOTanalysisisamicroanalyticaltool,focusingonaspecificcompany’sdataandanalysis.“Understandingthecompetitiveforces,andtheirunderlyingcauses,revealstherootsofanindustry’scurrentprofitabilitywhileprovidingaframeworkforanticipatingandinfluencingcompetition(andprofitability)overtime,”PorterwroteinaHarvardBusinessReviewarticle.“Ahealthyindustrystructureshouldbeasmuchacompetitiveconcerntostrategistsastheircompany’sownposition.” UnderstandingPorter‘sFiveForcesPortertheorizedthatunderstandingboththecompetitiveforcesatplayandtheoverallindustrystructurearecrucialforeffective,strategicdecision-making,anddevelopingacompellingcompetitivestrategyforthefuture.InPorter’smodel,thefiveforcesthatshapeindustrycompetitionare1.CompetitiverivalryThisforceexamineshowintensethecompetitionisinthemarketplace.Itconsidersthenumberofexistingcompetitorsandwhateachonecando.Rivalrycompetitionishighwhentherearejustafewbusinessessellingaproductorservice,whentheindustryisgrowingandwhenconsumerscaneasilyswitchtoacompetitor’sofferingforlittlecost.Whenrivalrycompetitionishigh,advertisingandpricewarsensue,whichcanhurtabusiness’sbottomline.2.ThebargainingpowerofsuppliersThisforceanalyzeshowmuchpowerabusiness’ssupplierhasandhowmuchcontrolithasoverthepotentialtoraiseitsprices,which,inturn,lowersabusiness’sprofitability.Italsoassessesthenumberofsuppliersofrawmaterialsandotherresourcesthatareavailable.Thefewersupplierthereare,themorepowertheyhave.Businessesareinabetterpositionwhentherearemultiplesuppliers.LearnmoreaboutfindingsuppliersandB2Bpartners.3.ThebargainingpowerofcustomersThisforceexaminesthepoweroftheconsumer,andtheireffectonpricingandquality.Consumershavepowerwhentheyarefewerinnumberbutthereareplentifulsellersandit’seasyforconsumerstoswitch.Conversely,buyingpowerislowwhenconsumerspurchaseproductsinsmallamountsandtheseller’sproductisverydifferentfromthatofitscompetitors.4.ThethreatofnewentrantsThisforceconsidershoweasyordifficultitisforcompetitorstojointhemarketplace.Theeasieritisforanewcompetitortogainentry,thegreatertheriskisofanestablishedbusiness’smarketsharebeingdepleted.Barrierstoentryincludeabsolutecostadvantages,accesstoinputs,economiesofscale,andstrongbrandidentity.5.ThethreatofsubstituteproductsorservicesThisforcestudieshoweasyitisforconsumerstoswitchfromabusiness’sproductorservicetothatofacompetitor.Itexaminesthenumberofcompetitors,howtheirpricesandqualitycomparetothebusinessbeingexamined,andhowmuchofaprofitthosecompetitorsareearning,whichwoulddetermineiftheycanlowertheircostsevenmore.Thethreatofsubstitutesisinformedbyswitchingcosts,bothimmediateandlong-term,aswellasconsumers’inclinationtochange.Learnhowtoperformacompetitiveanalysistostayaheadofotherplayersinthemarket.Totakefulladvantageofthisstrategymakesureyou’reabletoproperlycalculatecostofgoodssold(COGS).ExampleofPorter’sFiveForcesThereareseveralexamplesofhowPorter’sFiveForcescanbeappliedtovariousindustries.Theultimategoalistoidentifytheopportunitiesandthreatsthatcouldimpactabusiness.Asanexample,stockanalysisfirmTrefis lookedathowUnderArmourfitsintotheathleticfootwearandapparelindustry.Competitiverivalry:UnderArmourfacesintensecompetitionfromNike,Adidas,andnewerplayers.NikeandAdidas,whichhaveconsiderablylargerresourcesattheirdisposal,aremakingaplaywithintheperformanceapparelmarkettogainmarketshareinthisup-and-comingproductcategory.UnderArmourdoesnotholdanyfabricorprocesspatents,henceitsproductportfoliocouldbecopiedinthefuture.Bargainingpowerofsuppliers:Adiversesupplierbaselimitssupplierbargainingpower.UnderArmour’sproductsareproducedbydozensofmanufacturersbasedinmultiplecountries.ThisprovidesanadvantagetoUnderArmourbydiminishingsuppliers’leverage.Bargainingpowerofcustomers:UnderArmour’scustomersincludewholesalecustomersandend-usercustomers.Wholesalecustomers,likeDick’sSportingGoods,holdacertaindegreeofbargainingleverage,astheycouldsubstituteUnderArmour’sproductswiththoseofUnderArmour’scompetitorstogainhighermargins.Thebargainingpowerofend-usercustomersislowerasUnderArmourenjoysstrongbrandrecognition.Threatofnewentrants:Largecapitalcostsarerequiredforbranding,advertising,andcreatingproductdemand,whichlimitstheentryofnewerplayersinthesportsapparelmarket.However,existingcompaniesinthesportsapparelindustrycouldentertheperformanceapparelmarketinthefuture.Threatofsubstituteproducts:Thedemandforperformanceapparel,sportsfootwearandaccessoriesisexpectedtocontinuetogrow.Therefore,thisforcedoesnotthreatenUnderArmourinthe foreseeable future.StrategiesforsuccessOnceyouranalysisiscomplete,it’stimetoimplementastrategytoexpandyourcompetitiveadvantage.Tothatend,Porteridentifiedthreegenericstrategiesthatcanbeimplementedinanyindustry(andbycompaniesofanysize.)CostleadershipYourgoalistoincreaseprofitsbyreducingcostswhilechargingindustry-standardprices,ortoincreasemarketsharebyreducingthesalespricewhileretainingprofits.DifferentiationToimplementthisstrategy,yourcompany’sproductsneedtobesignificantlybetterthanthecompetition’s,improvingtheircompetitivenessandvaluetothepublic.Itrequiresthoroughresearchanddevelopment,pluseffectivesalesandmarketing.FocusSuccessfulimplementationentailsthecompanyselectingnichemarketsinwhichtoselltheirgoods.Itrequiresanintenseunderstandingofthemarketplace,itssellers,buyersandcompetitors.MoreinformationaboutthegenericstrategiesisavailableinPorter’s1985book,CompetitiveAdvantage (FreePress).AlternativestoPorter’sFiveForcesWhilePorter’sFiveForcesisaneffectiveandtime-testedmodel,ithasbeencriticizedforfailingtoexplainstrategicalliances.Inthe1990s,YaleSchoolofManagementprofessorsAdamBrandenburgerandBarryNalebuffcreatedtheideaofasixthforce,“complementors,”usingthetoolsofgametheory.InBrandenburger’sandNalebuff’smodel,complementorssellproductsandservicesthatarebestusedinconjunctionwithaproductorservicefromacompetitor.Intel,whichmanufacturesprocessors,andcomputermanufacturerApplecouldbeconsideredcomplementors.Additionalmodelingtoolsarelikelytohelproundoutyourunderstandingofyourbusinessanditspotential.Avaluechainanalysis helpscompaniesunderstandwheretheirbestproductiveadvantagelies,whiletheBCGmatrix helpscompaniesidentifywhichproductsarelikelytobenefitthemostfromincreasedinvestment.AdditionalreportingbyKatherineArlineandChadBrooks.Somesourceinterviewswereconductedforapreviousversionofthisarticle.ImageCredit:AnemStyle/Shutterstock MarciMartinBusinessNewsDailyContributingWriterWithanassociate'sdegreeinbusinessmanagementandnearly20yearsinseniormanagementpositions,Marcibringsareal-lifeperspectivetoherarticlesaboutbusinessandleadership.Shebeganfreelancingin2012andbecameacontributingwriterforBusinessNewsDailyandbusiness.comin2015.RelatedArticlesWhatIsValueChainAnalysis?WhatIsaDecisionMatrix?DefinitionandExamplesWhatIsaBCGMatrix?TechniquesandToolstoHelpYouMakeBusinessDecisionsHowtoStartaBusiness:AStep-by-StepGuideHowtoBecomeaDayTraderTopE-CommerceChallengesFacingSMBsMoreRelatedArticlesRelatedReviewsTheBestEmployeeMonitoringSoftwarefor2022TheBestPEOServiceProvidersof2022TheBestMedicalSoftwareof2022MoreRelatedReviewsLeadYourTeamUpdated06.29.22WhatIsCorporateSocialResponsibility?Businessesthatpracticecorporatesocialresponsibilityaimto...Updated08.05.22SWOTAnalysis:WhatItIsandWhentoUseItUseaSWOT(strengths,weaknesses,opportunities,threats)...Updated06.29.22BlueOceanStrategy:CreatingYourOwnMarketInsteadofviciouslycompetingwithothercompanies,findawayto...Updated06.29.22IntelProcessorsOvertheYearsIntelprocessorshavebeenonthecuttingedgeoftechnologyfor...Updated06.29.22WhatIsMarketIntelligence?Bycollectingandanalyzingdataaboutthemarketsinwhichyou...info@businessnewsdaily.com2005thAvenue,2ndFloorWaltham,MA02451©2022business.comAllRightsReserved.ResourcesHowtoStartaBusinessHowtoMarketYourBusinessHowtoHireForYourBusinessOurCompanyAboutUsAdvertiseWithUsPrivacyPolicyDoNotSellMyPersonalInformationTermsofUseAccessibilityCopyrightPolicyAdvertisingDisclosureOurBrandsBusiness.comBuyerZoneContactUsinfo@businessnewsdaily.com2005thAvenue,2ndFloorWaltham,MA02451©2022business.comAllRightsReserved.