Using Porter's Five Forces to Understand Your Competition

Do you have a clear view of who your competitors are? Do you understand how their actions in the marketplace are affecting your profitability and future planning? Being aware of what’s happening around you and what your competitors are up to is fundamental to the survival of any business – big or small. Knowing where your business is at is crucial to stay competitive and get more customers, but what business techniques can help you?

Michael Porter of the Harvard Business School developed Porter’s Five Forces Model, which is a tool for analysing market competition. Read on to find out how it may help your business.

What is Porter’s Five Forces Model?

Porter’s Five Forces Model takes the guesswork out of competitor analysis by systematically analysing what your competitors are up to and the impact their activity may have on your bottom line. It considers what other businesses in the industry are doing as a basic starting point. According to Porter, understanding both the competitive forces and the overall industry structure is the key to analysing the competition. Use the forces below to better understand your business’s competition.

Competitive Rivalry

This force seeks to measure how intense the competition currently is in the marketplace which is determined by the number of existing competitors and what each is capable of. If there are just a few businesses in the marketplace selling a similar product or service, then rivalry competition is said to be high. This could lead to advertising costs and price wars ensuing which may have a negative impact on a business’s bottom line.

Bargaining power of suppliers

This force looks at the number of suppliers in the marketplace, how much power the supplier has and whether it can raise prices which could well lower your company’s profitability. Generally, your business is in a better bargaining position if there are several potential suppliers available.

Bargaining power of customers

The purpose of this force is to determine the power of the customer to influence pricing and quality. Consumers have a great deal of power in marketplaces where the level of consumers is low comparable to the number of sellers. The reverse is true in markets where consumers buy products in small amounts and the seller’s product is very different from its competitors.

Threat of new entrants

This force looks at how easy it is for competitors to break into the market. If it’s too easy, then there is an increased risk of the business’s market share being depleted.

Threat of substitute products or services

This final force examines how easy it is for consumers to switch from a business’s product or service to another offering. This could be influenced by the number of competitors in the market, their prices, and the comparative quality of their product.

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