Porter's Five Forces Video
Learn how to analyse competitive
power using Porter’s Five Forces.
Your ability to make a good profit in business depends on the strength of your position in the market.
For instance, are there any competitors offering similar products? Is it easy for other organizations to enter your market if they see you're making a profit? Or can customers force you to lower your prices? If you don't think about your position carefully, you can easily find that you're working hard and still struggling to stay afloat.
This is where a tool like Porter's Five Forces is useful. It helps you discover who has the most power in a given situation. It can also show you if a product or service is likely to be profitable.
The tool assumes that there are five forces that determine competitive power in a business situation. These forces are supplier power, buyer power, competitive rivalry, threat of substitution, and threat of new entry. Any of them can work for or against you, so it's important to understand them. To use Porter's Five Forces as an analysis tool, you need to look at each one individually.
For example, with supplier power, you examine how easy it's going to be for your suppliers to drive up prices. If you have several to choose from, you can switch to a cheaper alternative if prices are too high. But you have fewer options if your choice is limited, which means that individual suppliers hold more power over you.
Next, look at buyer power. How easy is it for your customers to drive down prices? If there are only a handful of them in your market, they have control. If there are many more, your power increases.
Then, consider competitive rivalry. How many competitors do you have? Are their products or services as good as yours? If so, how can you establish a strong advantage over them?
Next, there is the threat of substitution. How easy is it for your customers to find another way to get what you're offering? The easier it is, the less power you have.
Finally, identify how likely it is for competitors to enter the market. The easier it is for them to swoop in, the harder it is for you to make a profit.
Once you've completed a Five Forces analysis, you'll be able to see clearly where you're at risk, so that you can overcome any obstacles. And if you're thinking about entering a new market, you can see at a glance how profitable you're likely to be.
You can find out more about Porter's Five Forces, including how to carry out an in-depth analysis, in the article that accompanies this video.