Porter’s Five Forces of Competitive Position Analysis
Updated: Dec 26, 2022
Understanding business analysis
According to Porter’s Five Forces, industries can be classified by their weaknesses and strengths based on the five competing forces that shape them. Corporate strategy is often determined by analyzing the Five Forces of an industry. Any part of the economy can benefit from Porter’s model to better understand the level of competition within the industry and enhance long-term profitability.
Michael E. Porter of Harvard Business School developed Porter’s Five Forces of Competitive Position Analysis in 1979 as a framework for assessing and evaluating a company’s competitive strength and position.
Porter’s Five Forces is a framework for analyzing a company’s competitive environment. The number and power of a company’s competitive rivals, potential new market entrants, suppliers, customers, and substitute products influence a company’s profitability.
Competition in the industry:
The industry's competition level is a critical factor in choosing a business niche. The more competitors there are in the industry, the more difficult it is to make money.
There are two types of competition: Business rivalry — this is the type of competition in which companies actively fight for market share. Strategic rivalry — this is the type of competition where companies have divergent business strategies.
Potential for new entrants into the industry:
New entrants into an industry are typically challenging existing market leaders. New entrants can enter an industry in a variety of ways, including new technology, new business models, and different business strategies. The potential for new entrants into an industry depends on the existing barriers to entry. Barriers to entry include economies of scale, regulatory compliance, brand recognition, capital requirements, and switching costs.
Power of suppliers:
Suppliers have a significant influence on an industry’s profitability. This is especially true for industries that rely on a few suppliers for their critical raw materials. If these suppliers raise their prices, the entire industry is affected since it cannot find an alternative source of supply.
Power of customers:
Customers are the most essential part of any industry. The health of the customers in an industry will help determine the health of the industry. The level of customer loyalty and the ability to switch to other products or services will ultimately decide the profitability of an industry.
The threat of substitute products:
This is how easily customers can switch to another product if they think your product is too expensive or inferior. Substitutes are products that provide similar benefits but are cheaper or better than your offerings. For example, the automobile industry is threatened by the rise of ride-sharing services like Uber and Lyft, which provide customers with similar benefits but at a lower price.
Porter’s Five Forces can help you understand the health of your industry and your company’s ability to compete in that industry. It can also help you decide where to focus your business strategy. If you find your industry too competitive, you may want to shift to a new industry with less competition.
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