Being aware of what’s happening in the marketplace and what your competitors are up to is fundamental to the survival of any business – big or small. Do you have a clear view of who your competitors are? And do you have an understanding about how their actions in the marketplace are affecting your profitability and future planning? These are important questions that you need to get a handle on if you want to remain competitive. And so in this article, we share a technique you can use to help you. Porter’s Five Forces Model developed by Harvard Business School’s Michael Porter is one widely used tool for analysing the competition. Read on to find out more.
Porter’s Five Forces Model
The five forces model identifies five factors that help determine whether or not a business can be profitable. The model considers what other businesses in the industry are doing as a basic starting point. And so for Porter, understanding both the competitive forces and the overall industry structure is the key to analysing the competition. So what are the five factors?
- Competitive rivalry
This force seeks to measure how intense the competition currently is in the marketplace and it’s 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. In this scenario, advertising costs and price wars can ensue which may have a negative impact on a business’s bottom dollar.
- Bargaining power of suppliers
This force looks at the number of suppliers in the marketplace, how much power your supplier has and whether it has the ability to raise prices which could well lower your company’s profitability. Generally, it follows that businesses are in a better bargaining position when there are a number of potential suppliers available.
- Bargaining power of customers
The purpose of this force is to determine the power of the consumer to influence pricing and quality. In marketplaces where there aren’t many consumers but there are lots of sellers, consumers have a great deal of power. 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
And the final force examines how easy it is for consumers to switch from a business’s product or service to an offering from a competitor. This could be influenced by the number of competitors in the market, their prices and the comparative quality of their product.
Understanding the competition is essential to your business’s long-term survival. Take the guesswork out of it by using Porter’s five forces model to systematically analyse what your competitors are up to and how this impacts on your bottom line.