To maintain competitive advantage for your business, you need a better understanding of your business strategy. You would need to use Porter’s five forces competitive advantage analysis to do that. 

Suppose you want to determine an industry’s strengths and weaknesses, identify its structure, and determine corporate strategy. In that case, you might want to dive into this article, as we will elaborate on the purpose of Porter’s five forces analysis and the steps to perform it

Let’s get started.

How To Use Porter's Five Forces Analysis

Introduction to Porter’s Five Forces Analysis: Overview of Michael Porter’s framework

Porter’s Five Forces Analysis was developed by Harvard Business School professor — Micheal E. Porter in 1979. This analysis serves as an essential tool for understanding the competitive force within an Industry. 

In 1979, Micheal E. Porter published “How Competitive Forces Shape Strategy.” You can find this article in the Harvard Business Review or Harvard Business School publications. In the article, Porter argued that people often viewed competition way too narrowly. As a solution, he came up with five (5) fundamental forces that shape the industry structure and analyze the competitive intensity of an industry.

These forces are essential, especially if you are a business owner because they can affect your industry’s long-term profit potential and attractiveness. Industry attractiveness in this context refers to the all in all industry profitability

The five competitive forces in Porter’s model are competitive rivalry, the threat of substitutes, the threat of new entry, supplier power, and buyer power. Before we dive into each force, you need to know that the primary purpose of Porter’s five forces model is to evaluate the root causes of an industry’s or company’s profitability.

Introduction to Porter’s Five Forces Analysis

Conducting a Competitive Analysis

Conducting a competitive industry analysis through Porter’s five forces model involves evaluating the competitive environment of an industry and the industry’s economy as a whole. 

This competitive strategy applies a structured approach to understanding the five forces that shape strategy, competition, and influence on an industry’s business strategy.

Some of the steps in the competitive analysis are:

  • Identifying industry competition;
  • Gathering information about existing firms and competitors;
  • Analyzing findings and assessing the implications of the five forces model;
  • Identifying opportunities and threats by doing a SWOT analysis;
  • Formulating business strategies. 

By using the five forces model, business owners like you can gain a deeper understanding of the competitive position of your industry and gain a competitive advantage. Now, let’s understand Porter’s five forces framework better.

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Assessing Industry Rivalry

Rivalry among existing competitors is a part of Porter’s framework. This force examines the intense competition in the marketplace. 

Rivalry is determined by the number and size of your competitors or the existing companies with the same niche market as yours. It is also determined by the industry growth, product differentiation, and exit barriers. 

Rivalry is high, especially when many competitors are equal in size to your company or business; even if you have more power, a competitor will still be roughly equivalent to your size. The competition is fierce when the industry grows slowly because it increases the fight for market share. 

When you and your competitors have identical products and services, rivalry is deemed intense, too. When rivalry is intense, competitors are most likely to use corporate strategies like advertising and price wars, which can hurt your business’s bottom line.

Analyzing the Threat of New Entrants

New entrants in an industry bring a desire to gain market share that puts competitive pressure on costs, prices, and rates of investments. Simply put, when new entrants exist, you will have to share the pie with the newcomer. The seriousness of the threats of new entrants depends on the entry barriers. 

The higher the entry barriers, the lower the chance that new entrants or direct competitors will enter the competitive landscape. Some examples of barriers to entry are customer loyalty for existing large organizations or brands, economies of scale, large capital scales, etc. 

If new competitors enter the industry’s economic landscape, existing players like you might need to increase your investments in the company’s product development or marketing to stay ahead, among others. 

Assessing the Threat of Substitutes

This force means that substitute products perform or do the same function as your industry product in a different way. In simpler terms, the product may not look identical to your product, but it has the same function

Customers tend to switch to other products if they feel that it performs the same functionality but is much cheaper or simply based on preference

Cheaper competitors with substitute products tend to attract a large customer base because many people are prone to buying more affordable products because of the economy now. 

Substitute products tend to lure customers away from your industry, so you need to take good notice of everything to make your business as attractive as possible to keep your loyal customers. Pure competition might arise if you tend to belittle substitutes. 

Evaluating Supplier Power

This force analyzes how much control and power a company’s supplier has over the possibility that they might raise their prices, have switching costs, or reduce the quality of the services or purchased goods. This, in turn, affects an industry’s profitability potential

The number of suppliers to choose is vital in determining supplier power. The stronger your relationship with your supplier, the more power you hold.

Do not underestimate the multiple suppliers’ bargaining power. That is why building a good relationship with them is super important. 

Evaluating Supplier Power

Analyzing Buyer Power

This force analyzes whether customers or buyers have the power to put the company under pressure by demanding better quality, etc. Customers also have the power to switch from one company to another. 

Buyer power is low when customers purchase in small amounts. Because of the innovation of the internet, customers can now compare products and prices over the internet and get the product based on their preferences. 

If you want your business to be successful, especially when it is reliant on customers and buyers for profit margin, you need to cater to their needs and demands because they also have the right to bargaining power. 

You are good to go if your industry structure is significant and does not rely on strong buyer power.  

Identifying Competitive Advantages

Many established companies consider identifying competitive advantages as part of their crucial strategic planning. These advantages will help your company stand out from its competitors.

Key elements in identifying competitive advantages are:

  • Cost leadership;
  • Unique value proposition;
  • Product difference from others
  • Strong reputation and branding;
  • Strategic alliances;
  • Customer experience, etc.

To identify these advantages, market analysis is an essential business practice. You and your business strategists can do SWOT analysis, benchmarking, competitor research, etc. 

It is important to identify your industry’s competitive advantage because it would establish a strong market position for your business, determine the number of buyers of your goal, and achieve sustainable and constant growth in the business world.

Strategic Decision-Making

Strategic decision-making is also a foundation for every successful business operation. This involves choosing the right course of action to achieve organizational goals and gain a spot in the competitive landscape of the marketplace. 

It involves identifying risks, making various alternatives or backup plans, and making decisions for the long-term objective

Continuous Monitoring and Adaptation

Monitoring and adapting are continuous processes for your business if you want it to stay responsive and resilient to the always-changing market dynamics, trends, consumer preferences, consumer behaviors, etc. 

Market surveillance is important for intense monitoring, like tracking performance metrics, getting customer feedback, leveraging new technology, and benchmarking competitors. 

Continuous Monitoring and Adaptation

The Bottom Line

Porter’s five forces model goes beyond the basics of competitive analysis by expanding the landscape and including dynamics between buyers, suppliers, manufacturers, new entrants, substitutes, etc. 

It is a beneficial tool used for market investments; while it is not perfect, it is still more than good enough for planning small investments. 

Porter’s model became widely known because it pushes companies to look beyond their own established business and to their industry group when making long-term decisions for the company. 

It is easy to understand and use and provides a better overview of your competitors. Remember, you can do Porter’s analysis independently or with a group; it is easy, comprehensive, and an excellent tool for your company. Best of luck. 

Frequently Asked Questions

What are some limitations of Porter’s competitive forces model?

This analysis doesn’t really apply to all industries. For example, if you are in a fast-moving tech industry, you may want to use a model other than Porter’s five forces.

How can I create my own porter’s model?

You can do it alone, especially if you are just starting your business, but it is recommended that you do this analysis with your team or stakeholders. You can divide a whiteboard into five sections following the five forces and identifying the contents for each. 

What preparations do you need for Porter’s model?

Before doing Porter’s analysis, you must first research the latest news or trends in your niche market, detail why you think your customers left your product or service, and research any competitive activity you are aware of.