The Porter's Five Forces Model as a Tool for Business Analysis
Written by Samuel Muriithi for Gaebler Ventures
The Porter's Five Forces model is a business model that was developed to help entrepreneurs understand the different forces that have an influencing role in their respective industries. With this model the entrepreneurs can not only gauge the viability of their business ideas but they can also design strategies to help them compete effectively in their environments.
The Porter's Five Forces model posits that a business has to contend with five different forces as it struggles to stay afloat and achieve its objectives of profitability. These five forces are as follows:
1. The power of suppliers
Suppliers may be in a position to influence the producing industry to a certain extent depending on the direction in which power is skewed. They may be able to hold sway on the availability of a product/service and in so doing have a big say on the price. The Porter's Five Forces model argues that a market segment is unfriendly when the suppliers can make price increments without the volume of supply having decreased. It is also unfriendly when these suppliers can reduce the quantities supplied at will, where the suppliers are the only sources for a critical product, when these suppliers can get organized either formally or informally, and when the market only has a few products that can substitute what the suppliers offer.
The situation is further untenable when the suppliers have the ability to impose switching costs to departing customers and when they can exert their influence downstream to control or purchase the distribution channels.
To remedy the situation, entrepreneurs are best advised to create win-win relationships with these suppliers or make arrangements to deal with multiple suppliers.
2. The power of customers
A market in which the buyer power is strong is non-ideal because in these conditions the buyers hold the greatest influence in price determination. Buyers bargaining power is increased when they can get organized to make alliances with others who provide identical products/services, when they can purchase products whose costs are a fraction of what they are accustomed to buying, when they can purchase undifferentiated products, and when they can switch suppliers/vendors without incurring significant switching costs. The Porter's Five Forces model also states that buyers influence is increasingly felt where they can be price sensitive thanks to the availability of alternatives and when they can make upstream initiatives to purchase product suppliers.
3. The power of new entrants
The Porter's Five Forces model offers that new entrants to an industry are observed when the particular industry is known to enjoy increasing profitability. These new entrants will make for a reduction in profits. As the industry's profits start tumbling it is expected that a couple of firms will exit. A firm can create a competitive advantage out of the barriers to entry that characterize a given industry. These barriers to industry often arise from the presence of proprietary knowledge and patents, economies of scale, high investment requirements, government regulations, the costs of acquiring customers, and high brand loyalty.
4. The influence of substitute products
Such products are produced by different industries and can be used to serve the same purpose as what a designated industry produces. Porter's Five Forces model indicates that the availability of more substitutes and subsequent affordability means that demand will increasingly become a factor of set prices. Substitute products' threats are felt hardest in industries that have price-based competition. These alternative products and services that result in intensified competition are mainly availed by the introduction of new technologies.
5. The power of rivals
The Porter's Five Forces model suggests that a firm can make use of industry rivalry intensities to create competing strategies. Rivalry intensity is increased by the presence of many strong competitors all seeking to consolidate the same resource and customer base, the decline of sales volumes and revenues, high fixed costs, high storage costs, the fact the products/services are highly perishable, and where buyers pay minimal costs to switch suppliers.
Samuel Muriithi is a business owner in Nairobi, Kenya. He has extensive international business experience in the United States and India.
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