Strategic Insights: Applying Porter's Five Forces to Business Growth

A Harvard Business School professor developed the Porter's Five Forces framework in 1979 to help businesses analyze market competitiveness.

Instead of comparing you to your competitors, this analysis of competitive forces considers suppliers, customers, and similar products that can affect your position within a market. The five forces refer to the threats or forces that threaten your business and include:

Threat of new entrants

The threat of new entrants refers to a new company directly competing with your brand for the first time in the market.

For example, if you sell computers, a new computer company could enter the market at any point. Analyzing this threat helps you determine the likelihood that a new company will try to attract the same customers with a similar product.

Bargaining power of suppliers

The bargaining power of suppliers refers to how much of a risk your suppliers are to your business. If your suppliers increase their prices, it may force you to increase yours, which can impact sales and overall profitability. This force measures the likelihood your suppliers will increase their prices.

If your suppliers have more competition, they're less likely to increase their prices because they must remain competitive in their own markets.

Bargaining power of buyers

The next threat is the bargaining power of your buyers. If you operate in an industry with fewer buyers, the customer has more room to negotiate prices and features. However, if you work in an industry with more customers, they have less power, allowing you to set prices.

Unfortunately, buyer power is also influenced by your competition. The more competition you have, the more bargaining power your customers have because they can easily purchase the same or a similar product from somewhere else.

Threat of substitute products or services

The threat of substitute products or services determines the likelihood that customers will choose to shop with the competition to purchase products that are similar to yours. However, it's not just your direct competitors you have to worry about. Instead, adjacent competitors can attract your customers as well.

For instance, bookshops thought they only had to worry about other bookshops in the area until phones, computers, and e-readers entered the market, allowing customers to read their favorite novels and magazines in an entirely different way.

The threat of substitute products or services helps you determine whether there are products available that could impact your sales. Unfortunately, this isn't always easy to determine. Bookshop owners had no way of knowing that the smartphone industry would disrupt theirs.

Intensity of competitive rivalry

The final threat is the intensity of your competitive rivalry. You should know how many competitors they have, the types of products and services they sell, their price points, standout features, and overall strengths and weaknesses.

Examples of Porter's Five Forces

The Porter's Five Forces template can help you determine your position in the market and the likelihood of competitive forces impacting that position and your growth.

To help you understand this concept a little better, let's take a look at some examples of each of the Five Forces:

• Threat of new entrants: Knowing as much about your market can help you determine the threat of new entrants. If you've created an entirely new market, as Tesla did with the electric vehicle (EV), the likelihood of new entrants is high.
• Bargaining power of suppliers: The more suppliers you have, the less bargaining power they have because you can source products from different suppliers if prices increase. For example, e-commerce company suppliers have less bargaining power because business owners can source products from anywhere.
• Bargaining power of customers: Your customers have more or less buyer power depending on the level of competition in the market and the number of total customers. If you sell footwear, your customers have more bargaining power because they can shop anywhere, online or in stores. However, if you sell footwear made from a special material they can't get anywhere else, your customers have less bargaining power.
• Threat of substitute products and services: The threat of substitute products can be difficult to determine because another industry may disrupt yours. However, you can look at your direct competition to determine the likelihood customers will shop with them if you change pricing or lower your product quality. With the camera company Nikon, their threat would be a direct competitor like Canon or smartphones like iPhones, which come from an adjacent industry.
• Intensity of competitive rivalry: The threat of your competitors is always looming. However, all brands can compare their products, prices, features, and strengths and weaknesses to determine the threat another company poses to them. For instance, Starbucks might compare its offerings to Dunkin' Donuts.

Porter's Five Forces framework is used to determine a company's position within a market and compare itself to competitors, allowing it to adjust its business plan to meet customer needs and demands.

You should use Porter's Five Forces model when entering a new market or starting a new business. The information from Porter's Five Forces analysis will tell you whether it's a good idea to enter a new competitive market and provide information about industry growth, price sensitivity, and competitors' products or services and position within the market.

This model can also be useful when evaluating your current position within a market because it gives you the full picture of what the future may entail, giving you key insights that can help you prepare for industry changes and new competition.

Pros and cons of Porter's Five Forces model

While Porter's Five Forces model can help you get the lay of the land in terms of the market and your position within it, it's not a perfect competitive analysis tool.

Instead, it works best when used in conjunction with other market and competitive analysis models like SWOT analysis. Understanding the pros and cons of Porter's Five Forces can help you determine if you should use it to compare your business to the competition.

Pros

Identifying Porter's five competitive forces can help with the following for your business:

• Industry analysis: Porter's Five Forces framework is more than competitive analysis; it measures how your suppliers and customers can directly affect your position within a market. By understanding the business's relationship with suppliers and customers and the risk of industry disruptions, businesses can learn more about the market and how it might change in the future.
• Competitive positioning: Porter's Five Forces analysis won't tell you exactly where you stand within the market, but it can provide key insights into competitive positioning. By measuring the likelihood that new threats will enter the market or customers will find alternatives in adjacent markets, you can determine whether you can stand up to industry changes.
• Strategic decisions: Porter's Five Forces analysis can help businesses make better strategic decisions by allowing them to plan based on what they've learned about the market as a whole. It can help you determine whether you need to release new products or services or enter a market.
• Risk assessment: Porter's Five Forces isn't just a market analysis tool; it's a risk analysis tool because it provides you with key insights that help you identify threats to your business now and in the future. By identifying the potential threats from new entrants, substitutes, or powerful suppliers or buyers, companies can develop strategies to mitigate these risks and protect their market share.

Cons

Despite the benefits of using Porter's Five Forces to understand the market and your position within it, this analysis does have limitations.

• Not a complete model: This competitive analysis is only a partial model that simplifies the competitive environment by focusing on just five forces. It can provide insights into factors that influence competition but doesn’t cover every aspect of your product strategy.
• Lack of quantitative analysis: Porter's Five Forces relies on qualitative data instead of hard numbers. While it offers a dynamic and structural approach to market analysis, it doesn't provide the data necessary to measure the impact of each potential threat or your exact position within a market.
• Possibility of subjective outcomes: Because Porter's Five Forces relies on qualitative data, the interpretation is often subjective. Different stakeholders within your company may interpret information differently, leading to inconsistent or confusing results.
• Not applicable to all industries: Unfortunately, this model may not work for all industries, especially rapidly evolving industries that use disruptive technologies or digital platforms.

You can use a Porter's Five Forces template every time you perform the analysis to simplify the process. Keeping each category consistent can help you keep track of your results to see how the industry and your business have changed over time.

To apply the Five Forces to your business, you should gather a group of key stakeholders, such as business owners, customer service reps, marketing and sales professionals, and so forth, allowing each to contribute based on what they know about the market and your industry.

Every analysis and process will vary depending on the size of the business and its industry. However, you can follow these steps to implement the Five Forces into your business's competitive strategy:

• Research: Make sure you're researching to back up your assumptions. You might believe you know every competitor in your market, but forgetting one could leave room for risk because you're not monitoring their products or services. In addition, while Porter's Five Forces relies on qualitative analysis, you should still use data to back up your results.
• Evaluate: After completing your analysis, you should evaluate what you've learned. Consider each force individually and how it impacts or could impact your business strategy. Do you have a plan in place if your supplier decides to increase prices?
• Act: Taking the data you've evaluated, you can build new strategies to help your business grow in the market. Based on the analysis of each force, develop strategies to improve your positioning through differentiation, product pricing, and innovation.

Leverage Porter's Five Forces for strategic insights

Porter's Five Forces can provide strategic insights into your business and its market. By analyzing the forces of competition, you can gain a comprehensive understanding of your positioning, identify threats, and develop new and better business strategies.

After identifying threats and opportunities, you can act with Mailchimp. With AI predictions, our suite of marketing tools can help you create personalized strategies tailored to your customers to improve your position in the marketplace.