Business Start-Ups

Michael Porter, professor at Harvard Business School, is famous for the model we’re going to introduce. It’s normally referred to as “Porter’s 5 Forces”. Much easier to remember than the original name: “Porter’s Competitive Forces Model”. Although, the original does give us more information on what it’s all about and how it can help us.

Porter’s 5 Forces are essentially a wide-reaching business concept that can be used to maximise resources and outperform competitors, regardless of the direction the company will take. According to Porter, if you don’t have the perfect plan, it’s impossible to survive in the business world.

As a result, developing a competent strategy is not only a means of survival, it also lets you reach an important position within a company, as you get closer and closer to making your dreams come true.

Using this model, we can analyse an industry by identifying and analysing 5 forces: rivalry between competitors, the threat of new entrants, the threat of substitute products entering the market, the bargaining power of suppliers and the bargaining power of customers.

The threat of new entrants, the threat of substitute products entering the market, the bargaining power of suppliers and the bargaining power of customers affect rivalry between competitors, generally making it the most powerful force of the lot.

Analysing these forces gives us insight into the level of competition in the industry, how attractive is it, opportunities and threats. Then we can develop strategies to take advantage of the opportunities and/or deal with the threats.

The 5 forces that this tool considers to be present in all industries are:

1. Rivalry between competitors.
2. The threat of new entrants.
3. The threat of substitute products entering the market.
4. The bargaining power of suppliers.
5. The bargaining power of customers.

According to Porter, if we divide an industry into these five forces, then we are better placed to analyse its level of competition and to get a clearer idea about how attractive it is.

In the case of a company in the industry, we’ll obtain a better analysis of the environment, assisting us to identify opportunities and threats.

5 Competitive Forces

The first competitive force is the existence or entry of substitute products. The main factors that lead to increased competitiveness and reduce profitability in the sector are: Likelihood of the customer substituting the product. Differentiation between products and/or the prices of other products.

> Porter’s 5 Forces

The second competitive force is rivalry between competitors. If rivalry between companies competing in the sector declines, then there will be less rivalry in general and profitability will increase. Some of the factors that determine the rivalry between competitors are: barriers to exit, level of market growth, industrial overcapacity and/or the power of competitors/suppliers.

Another competitive force is the threat of new competitors. When determining how attractive and profitable a market is, these factors will have an impact: barriers to entry and economies of scale, access to distribution channels, and quality needs or the advantages of the learning curve.

The fourth competitive force is the bargaining power of suppliers, where the degree of concentration, the impact of the supplier cost on the total cost of the product, and/or the specific characteristics of the product are some of the main factors determining the profitability of the sector.

The fifth and final competitive force is the bargaining power of the customers. The customers’ purchasing volume, the degree of dependency on distribution channels and/or the customers’ price sensitivity are some of the factors that make up this competitive force.

Interview with Michael Porter at Harvard Business Publishing

Analyse your market and competition

Use the Porter diagram to analyse the competitive situation in the industry/sector where you want to launch your business idea.

Reflect on each of them and analyse how they could affect your business model.

Self-Evaluation Checklist

• I understand the complexity of the competitive environment where I want to develop my business idea.
• I’m aware of the rivalry and competition in the market.
• I understand the power that suppliers have over my business.
• I’m paying attention to new competitors in the sector.
• I’m going to keep my eye out for new products or substitutes that could steal my market share (or change the outlook altogether).
• I understand the capacity and power of customers to negotiate in my sector and change the reality of my business.
• I’ve discovered new opportunities with Porter’s Forces strategic analysis =)