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Porter’s 5 Forces and the Porter’s Model

Porters Model

Porter’s 5 Forces and the Porter’s Model

Porter’s 5 forces and the Porter’s model are a system of evaluation when it comes to assessing competitors and the overall competitive landscape of any given industry. By evaluating the amount of competition in an industry, an analyst can determine the level of profitability offered by that industry. When it comes to competitive intelligence, Porter’s is a great way to get an accurate estimation and craft realistic expectations of what an industry can offer. If you have just completed a SWOT analysis and are looking to take the next step, conducting a Porter’s analysis is the right place to start.

The five components that make up the Porter’s model are as follows:

  • Threat of Industry Competitors

  • Threat of New Competitors

  • Bargaining Power of Buyers

  • Bargaining Power of Suppliers

  • Threat of Substitute Products or Services

These five components all work hand in hand, showcasing the possible barriers towards your ability to operate in a specific industry. Depending on your overall assessment, one specific component might hold more weight in your overall judgement than another. Everyone has their own threshold for what amount of competition they are willing to compete with. Rarely do you find a market with no competition. If you do you will probably lose that luxury pretty quickly to someone looking to get a share of the earnings. Maybe only one or two of these components is enough for you to say that you won’t bother with a market, maybe it takes strong indicators in all five to dissuade you. 

Each company is different and holds their own strengths and weaknesses. Some threats may seem bigger than others and some opportunities are more enticing than others. In order to utilize Porter’s 5 forces effectively, you need to have a considerable understanding of your own business; how it operates, what its goals are, and what it is capable of realistically achieving. 

 

Porter's model

When to Use a Porter’s Model

When it comes to evaluating competitors, a Porter’s model can be of immense value, specifically when looking to expand into a new market. Looking to expand, whether it be the first market you’re breaking into or an overseas expansion, can be tough. Without doing the proper research and developing a clear plan it is pretty much impossible to guarantee success in breaking into a new market. This may seem like an obvious step in writing a business plan but many large, well-known, companies have made the mistake of entering a new market without a proper understanding of the consumer habits and existing competitors. Situations like the opening of Euro Disney or Netflix’s failure to expand in India have become teachable moments for any business looking to expand into a new market. 

When it comes to competitive intelligence the research and analysis that ArchIntel provides can offer the insight needed to facilitate expansion efforts. We conduct Porter’s model analysis as part of our investigation. Market intelligence is a branch of competitive intelligence that specializes in analyzing markets for the specific purpose of expansion and breaking into new markets. By utilizing open source intelligence (OSINT), we can start learning about these markets. We are able to learn which similarities and differences they may possess and what areas may cause more of a threat. Knowing how to adjust your business strategy can show how realistic expansion might be, as well as what you can expect from your efforts.

Threat of Industry Competitors

The first thing to consider in a Porter’s model is the amount of current competitors. When entering a new market it’s important to assess the current market standing and have a realistic estimation of what percentage of the market share you could expect to gain. An industry with more established and successful competitors means it will be harder to break through and the market share available will be smaller. 

If you have the confidence that your business model or product is able to break through this tough competition you better be able to back it up. Tough competition may be a deterrent for some but new ideas and innovative products can shake up any industry, overturning industry icons.

Threat of New Competitors

An industry with less competition is definitely more opportune but that doesn’t mean it will stay that way. If you have stumbled upon an untapped market with ease of access to an ample amount of the market share, chances are you aren’t the only one. 

An industry with a threat of new competitors is one that is either emerging or has recently had new technologies introduced to its ecosystem. Both of these can be exciting markets to join in on since anything can happen and success can be found from many different avenues but it can also be a high risk. Due to possibility of anything happening it’s important to keep in mind that the plan you thought was working could turn out to fail at any moment. If you are a business who is versatile and adapts to changes this might not be as much of an issue for you but for other businesses who like to keep things running the best way they know how, it can be a struggle and almost certain failure.

New competitors can come from anywhere and often bring ideas that completely shake up the market. Whether it be a start up trying to disrupt the status quo or a much larger corporation looking to get a slice of the market, funneling in funding and resources that exceed the competition a new competitor can mean a whole new set of rules. As stated before if you are a company that likes to adapt this can be a challenge you are willing to take on but for some companies this is just too much to deal with.

 

Bargaining power

Bargaining Power of Buyers

How much power do the consumers in this market have? This has a lot to do with the culture in which those consumers live as well as how many consumers there are in that specific market. A market with a smaller consumer base, especially one that is knowledgeable of the industry and its products, will have more buying power. They know that if they do not like the price of your product they can demand a better deal and they will have a better chance of getting their way since they are one of a few potential buyers. On the other hand, a market with an abundance of potential buyers doesn’t have the same amount of power in a sales situation. This consumer will have to take the price you are giving them because everyone else in that market is doing so and the company selling their product or service will not miss their business.

The size of the market population is an important factor but it is not the only factor to keep in mind when assessing the threat of buyer power. Knowing the culture and expectation of these consumers is vital to being successful in expanding business, especially expanding internationally. Not all consumers are the same, they have different values, incomes, traditions, and relationships with material goods. If you are not looking to expand far from your initial market this might not be as big of a factor for your decision making but if you are expanding internationally into a market that you are unfamiliar with this can be a make or break factor. 

Underestimating the differences in culture is a mistake made too often by companies blinded by solely the size of the potential customer base. Expanding into markets like China and India may seem almost irresistible to western companies due to the population size and the lack of established competitors in these countries but if you don’t account for differences in culture, politics, and historical events you could end up losing big time in these markets. Leading to some issues such as breaking laws, failing to show the appeal of your product, or even offending the people of that market, making it much harder to try to reenter the market in the future.

Bargaining Power of Suppliers

Similar to the power of the buyers it’s important to keep in mind the power that suppliers have as well. If there are fewer suppliers they will have more power in business decisions because they know the value they possess and can ask for higher prices. If there are more suppliers they will have less power as they will have to compete with other suppliers in order to get your business.

Especially when expanding far away from your home facilities, these local suppliers can be your only option. Whether they have power or not you will probably end up utilizing their services as it will be more efficient to maintain operations. Keeping in mind the amount of power they have can be another deciding factor in if this expansion is right for your business at this time. Unless you are a company with a strong vertical integration system, you will have to deal with suppliers to some extent in order to operate your business.

 

Substitute Products or services

Threat of Substitute Products or Services

The final component of Porter’s 5 forces is the threat of substitute products or services. These substitutes can come from other competitors but a point that hasn’t been raised yet that influences this component is the already established means in which the native consumer base was getting by before you brought your product to them. 

For example, Starbucks infamously failed in Australia. There were multiple reasons for this but one of the biggest was that it was too hot in Australia for Starbucks coffee to be appealing to consumers at large. This was before the rise of the ice coffee trend and a company that offered hot drinks in a climate was destined to fail. Australian consumers were surely getting their caffeine from other sources and did not see the brand name as enough of an appeal to change their habits. 

If a consumer does not see your product or service as a worthwhile replacement for their current methods they will not jump at the opportunity to patronize your business. Even if your product or service is a success in your home market it can be seen in a completely different light by another