Porters Five Forces

by wallaby460 (student)

Porters Five Forces

What Works for Management

Competing in Your Industry

By Jain Subnash,

Understanding the Phantom Competitors in Your Industry.

Many business owners fear the global economy and labor market, but is that the only danger on your horizon? There are other forces (phantom competitors) that can impact your long-term success and this information will help you to discover them for your industry.

This is a summary of what Michael Porter, a professor at Harvard Business School, calls Industry Attractiveness, or the Five Forces Model. I will attempt to present his model in a way that can be easily understood and applied to your specific business situation. I hope you find this helpful to identify and compete with the “Phantoms” that threaten your business.

One of the biggest mistakes made by smaller, entrepreneurial businesses is to assume they do not need to think about strategy. All businesses should be concerned about strategy and how to position themselves in their competitive environment.

Whether you’re starting a business or trying to compete in an existing business, the first issue to address is the attractiveness of your industry. Analyzing your industry attractiveness (IA) will help you decide if you should get into a new industry, get out of the one you’re in or redefine it.

Porter identified five basic forces of competition. I have referred to them as “Phantoms” because most businesses do not understand that these forces are the phantom competitors that impact them every day. The first task is to understand your position in the industry and either hold onto a good position or improve a bad position. Even a poor performing industry can offer opportunities for a business that establishes the proper niche by applying strategic thinking.

Action Steps

The best contacts and resources to help you get it done

Analyze the Rivalry Among Existing Firms

Evaluate how the current competing businesses react to change in the industry. When competitors in your industry are threatened, does it turn into a blood-bath or do all firms follow acceptable practices? An aggressive rivalry can create several problems, especially if you are

- a new business wanting to enter the market

- attempting to cut prices

- attempting to “shake-up” the industry.

I recommend: You can evaluate the Competitive Rivalry of your industry by answering the following questions: (a strong affirmative answer indicates a low competitive rivalry, which is good).

- Is your industry experiencing rapid growth?

- Are the competing products/services easily differentiated?

- Is it easy for competitors to exit the market?

- Are all the competitors small businesses?

- Is it expensive for customers to switch competitors?

Here is a good that helps to understand the five forces. You can utilize the software to help analyze all five of the forces.

Research the Threat of Substitute Products or Services

Many are caught by surprise when they learn that there is nearly always another way for your customers to satisfy their needs. It could entail the use of plastic instead of metal, software to replace paper or web-meetings to replace travel. Alternatives are always emerging and can impact your profitability. Prospects may even choose to do nothing by simply “living with” their problem.

I recommend: You can evaluate the Threats of Substitutes in your industry by answering the following questions: (a strong affirmative answer indicates a low threat).

- Is there a minimal likelihood for products to become obsolete?

- Are competitive products at optimum performance for the price being charged?

- Is there no possibility of reverse engineering?

- Do prospects have to purchase something to solve their problem? (no-action is not a possibility)

You could get more information by reading Michael Porter's book titled .

Identify the Threat of New Entrants

How easy it is for others to get into the ...

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I recommend: You can evaluate the Threats of Substitutes in your industry by answering the following questions: (a strong affirmative answer indicates a low threat).

- Is there a minimal likelihood for products to become obsolete?

- Are competitive products at optimum performance for the price being charged?

- Is there no possibility of reverse engineering?

- Do prospects have to purchase something to solve their problem? (no-action is not a possibility)

You could get more information by reading Michael Porter's book titled .

Identify the Threat of New Entrants

How easy it is for others to get into the same business? New entrants can increase the output of the industry’s goods or services, which can lower prices and reduce profits. By creating barriers that inhibit these new entrants, all the current companies in the industry will benefit. If you are considering the entry in an industry, you are the phantom competitor. As the new entrant, you must consider how difficult it will be for you to overcome the existing barriers.

I recommend: You can minimize the Threat of New Entrants by creating barriers that prohibit others from entering the market. Affirmative answers to the following questions indicate a strong ability to create those barriers. (If you are entering the market, answer this from the competitors' perspective. Affirmative answers will inhibit you.)

- Do you have proprietary and protected technology?

- Does your long-term industry experience provide a significant advantage?

- Is it expensive/difficult for customers to switch away from your product/service?

- Do you have all the distribution channels locked-up?

- Can you easily differentiate yourself from the competition?

- Can you significantly benefit from the economies of scale?

Another good addresses your competitive advantage.

Rate the Bargaining Power of Suppliers

Suppliers are not usually seen as a competitive force, but they should be. Suppliers can impact your costs as much or more than a new entrant. Some suppliers may identify a greater business opportunity by becoming one of your direct competitors. If you are dependent on a single supplier and have no means to switch suppliers, your supplier strength and the attractiveness of the industry is reduced. If you can eliminate a supplier by producing their product or service in-house, you can improve the industry attractiveness.

I recommend: You can evaluate the Suppliers Bargaining Power in your industry by answering the following questions. (strong affirmative answers indicate minimal bargaining power, which is good for you)

- Do you have no dependence on your supplier; can you easily switch to another supplier?

- Is your business critical to your supplier; are you one of their primary customers?

- Is it simple and inexpensive for you to switch to alternative materials?

The overall attractiveness of your industry is a factor in your position on .

Rate the Bargaining Power of the Buyers

Buyers can determine the flexibility you have in your pricing strategy. If you’re selling to Wal-Mart, or other big box retailers, you are at the mercy of their pricing, inventory maintenance, returns, and in-store advertising policies. If you are selling a unique product or service into an underserved market you have greater flexibility and a more attractive industry.

I recommend: You can evaluate the Buyers' Bargaining Power in your industry by answering the following questions. (Strong affirmative answers indicate minimal bargaining power, which is good for you)

- Is the cost of your product/service insignificant when compared to your prospects financial resource?

- Are prospects unfamiliar with your industry and product/service?

- Do you sell a lot of one product or vs. one sale that sustains your company?

- Is it difficult and expensive for prospects to shop-around for other products/services like yours?

- Is it expensive/difficult for customers to switch away from your product/service?

- Can you easily differentiate yourself from the competition?

are also determined by the bargaining power of buyers.