What Is Porter’s Five Forces Model? How Does It Shape The Market And Industry?
Porter’s Five forces are a model that analyzes the five forces that govern any industry and help find its weaknesses and strengths. The Five forces analysis is often used in order to find out an industry’s structure. This is then used to determine the corporate strategy. Porter’s model could be used in any economic segment. Eventually, you can decide the level of competition and improve the profitability of a company. This Five Forces model is named after a Harvard Business School professor i.e., Michael E. Porter.
The five forces model is a business analysis model that we can use to understand why different industries can sustain multiple levels of Profitability. This model was first introduced in 1980 in Porter’s book “Competitive Strategy: Techniques for Analyzing Industries and Competitors.” Since then, the five forces model is being actively used to analyze corporate strategy and industry structure for the company.
Porter has mentioned five forces that will play an essential part in shaping the market and industry. These five forces are often used to measure the intensity of the competition, attractiveness, and the industry’s profitability.
Porter’s Five Forces
- Competition present in the industry
- The Potential of new entrants into the industry
- Power of suppliers
- Power of customers
- Threat of substitute products
1. Competition in the Industry
The first of these forces implies to the number of competitors and their ability to cut into your market share. Larger will be the number of competitors with the products and services they deal in, the lesser will be the company’s power. Suppliers and buyers find out more about the competition if they can offer a better deal. On the other hand, if the rivalry is less, a company benefits from charging high prices and selecting the terms of the deal to obtain higher profits.
2. Potential of New Entrants into an Industry
The company’s power is also impacted by the new players that enter the market. The less time and money a competitor have to invest in entering the company’s market, the more the company’s position will be inhibited. If an industry has a strong barrier for others to enter, the better it is for the existing companies to thrive and expect better prices.
3. Power of Suppliers
The next is the power of suppliers and how they can increase the cost of the inputs. It will be impacted by the number of suppliers of key inputs for a particular good or service, the exclusivity of these inputs, and the cost the company will have to pay to switch to any other supplier. Therefore the supplier gets more power and can modify the input costs as per his need. Apart from that, when many suppliers or the cost of switching between suppliers is low, the company could keep the input costs less and thus increase the profits.
4. Power of Customers
The customers keeping the prices low or their power level is another of the five forces. It is impacted by the number of customers a company has, how significant each of them is, and how much cost the company accrues to find new customers. A smaller client base implies that the customer gets more power to negotiate and claim less prices.
5. Threat of Substitutes
The last of the forces is the threat of substitutes. These substitute goods or services are those that can be used as a replacement for a product or service. Companies whose products have no close substitutes will get the power to increase the prices. If there are close substitutes to the product, the customers might switch over, reducing a company’s power considerably.
By understanding Porter’s Five forces and how to apply them, the company can adjust the business strategy to optimally use the resources and thus get higher revenue for the investors.
How Porter’s Five Forces Model Is Used In Various Industries
There can be multiple examples of how these five forces could be used for various industries. The main aim is to find out the opportunities and threats that can be damaging for any business.
Competitive rivalry: Under Armor brand gets intense competition from brands like Adidas and Nike. The latter has loads of resources and is thus trying to make a dent in the market to gain market share in an upcoming category. Since Under Armour does not have any process patents, its designs could easily be copied in the future.
Bargaining power of suppliers: If the supplier base is diverse, it limits their bargaining power. The products of Under Armour get produced by many manufacturers operating from various countries. This gives an advantage to the brand as it reduces the supplier’s leverage.
Bargaining power of customers: Under Armour’s customers comprise wholesale customers and end-user customers. The wholesale customers get leverage while bargaining as they can easily replace Under Armour’s goods with that of their competitors. Since the power of negotiation for end-user is less, the brand gets high recognition.
The threat of new entrants: You have to put in significant capital investment that will be used for the advertising, branding, and creating a demand for the product that will limit new players from entering in the sports apparel category. But companies who are already present in the sports apparel industry could any time enter in the performance apparel market.
The threat of substitute products: Demand for sports footwear, performance apparel, and accessories is expected to grow. Therefore this force will not harm Under Armour in the coming future.
Strategies For Success
Once the analysis is over, you can implement a strategy that will help in expanding the competitive advantage. Porter has mentioned three strategies that any company could implement for any industry.
Cost leadership
The goal is to increase your profits by bringing a cut in the costs while charging the standard prices or by increasing the market share by cutting the sales price.
Differentiation
To implement this strategy, your products have to be better than that of your competitors. For this, you need to do adequate research and development along with effective sales and marketing tactics.
Focus
The successful implementation of any strategy involves selecting the niche markets in which they can sell their goods. It also requires that you understand the marketplace, sellers, buyers, and competitors in detail.
What Are The Alternatives To Porter’s Five Forces?
While the Five Forces mentioned by Porter are considered effective and time-tested, many people criticize it for not explaining any alliances. In fact, in the 1990’s professors, Adam Brandenburger and Barry Nalebuff used the tools of game theory to create a sixth force, i.e., “complementors.”
As per this model, the complementors will sell products that work closely with a competitor’s product or service. For example, Intel manufactures processors, and Apple manufactures processors, and they can be treated as complementors.
The additional modeling tools will help you to understand the business and its future prospects. Conducting a value chain analysis helps the companies to understand the product advantage they have. At the same time, the BCG matrix guides the companies in finding which of the products will benefit if the investment is increased.
