Contents
- Porter's Five Forces
- Why Use Porter's Five Forces Analysis
- Force 1. Supplier Pressure
- Force 2. Buyer Pressure
- Force 3. Pressure from Existing Competitors
- Force 4. Threat of New Entrants
- Force 5. Pressure from Substitute Products
- Quick Analysis
- Full Analysis
- Result Evaluation
- Success Strategies
Porter's Five Forces
The Five Forces model by Porter is an analytical method that helps identify factors affecting a company's profitability. Developed by Michael Porter in 1979, it is still widely used in business to assess the competitive environment. The core idea of the model is that five key forces influence a business's profitability:
- Supplier Pressure.
- Buyer Pressure.
- Pressure from Existing Competitors (internal competition).
- Threat of New Entrants.
- Substitute Products.
These forces can be divided into two categories: three forces of "horizontal competition" and two forces of "vertical competition." The less pressure exerted by these forces, the more likely a company is to achieve high profitability. Conversely, strong pressure can lead to decreased business profitability.
Why Use Porter's Five Forces Analysis
Porter's Five Forces analysis is an important tool for developing a long-term business strategy. This model is often used in conjunction with other strategic analysis methods, such as SWOT analysis, BCG matrix, McKinsey matrix, and PEST analysis. For a novice entrepreneur, the analysis can reveal potential risks, assess the level of competition, and help decide whether to enter a specific niche. For existing companies, this analysis enables risk management and measures to maintain high profitability.
Force 1. Supplier Pressure
The cost of goods and product assortment is significantly influenced by the quantity and quality of supplied raw materials. Suppliers can raise prices or provide low-quality goods, negatively impacting the company's profits. The risk increases if:
- The number of suppliers is limited.
- The available raw materials do not meet the needs of all companies.
- Switching to other suppliers requires significant costs and time.
- Suppliers have more favorable contracts with other clients.
The stronger the influence of these factors, the higher the company's dependence on suppliers.
Force 2. Buyer Pressure
In a highly competitive environment, buyers always seek higher quality goods at lower prices. This forces manufacturers to constantly improve the quality of their products and lower prices, leading to decreased profits. It is also important to monitor changes in buyer needs, as their preferences can change rapidly. The more choices buyers have, the stronger the competition among manufacturers.
Force 3. Pressure from Existing Competitors
Internal competition within the industry leads to increased marketing costs and improved product quality. Competition intensifies when:
- Many companies with equal sales volumes exist in the market.
- The market shows weak growth or is in a decline phase.
- Products from different manufacturers are very similar.
- Products are perishable, requiring price reductions for sales.
The fewer players in the niche and the more differentiated they are, the more stable the company's profits.
Force 4. Threat of New Entrants
New manufacturers often enter the market with more advanced technologies, undermining the positions of existing companies. Barriers to market entry, such as established relationships with suppliers and customers, and the presence of patents, are used to assess the threat of new competitors. The higher the barriers, the harder it is for new players to enter the industry.
Force 5. Pressure from Substitute Products
Almost any product can be replaced by an alternative that solves the same problem for consumers. For example, a person may choose between going to a restaurant or a movie. If sales of one substitute product are rising, sales of another are likely to decline. This compels manufacturers to continually improve quality and develop marketing strategies to maintain buyer interest.
Quick Analysis
A tabular method can be used for a quick analysis of Porter's Five Forces. The first column lists all five forces, and the following three columns assess their influence and the possibility of addressing problems on a 10-point scale. The final column summarizes the overall rating, providing a comprehensive view.
Full Analysis
For a deeper analysis, each force needs to be evaluated based on criteria using a three-point scale. This will help determine the level of risk for each force: low, medium, or high. After this, the results are organized into a tabular format, where threats, risk levels, descriptions, and work directions for improving the situation are recorded.
Result Evaluation
Evaluating Porter's Five Forces helps determine the level of risk and formulate a strategy to minimize threats and increase profits. For example, with a high risk of new competitors, it is advisable to improve the product and monitor buyer demands. The model has a dynamic nature, and its parameters can change under the influence of technological and legislative factors.
Success Strategies
In conclusion, the Five Forces model by Porter helps choose the most effective strategy based on the current market situation. The main strategies include:
- Cost Management: The goal is to reduce production costs and product prices to capture a larger market share.
- Brand Differentiation: Creating a unique product that stands out from competitors.
- Focus: Choosing a narrow niche to minimize competition and enhance efficiency.
The Five Forces model provides valuable insights for long-term business development, but it is important to remember that it is just one of many analytical tools and should not be the sole basis for making strategically important decisions.