In this article we describe Porter's Five Forces Model, this is a strategic model that is based on five forces that determine the attractiveness of a market.
What is the Porter’s Five Forces Model?
The Five Forces Model is a strategic model that is based on five forces that determine the attractiveness of a market. By working out this model, an assessment can be made over the relative attractiveness of an industry. The strategy of an organisation can be adjusted based on this.
Porter’s five forces model is often used in writing an analysis on competition. An analysis on competition consists of two parts: Competitors Analysis and the degree of competition within the industry (the component in Industry Analysis). Porter’s five forces model is highly suited for the latter. This is a component of Industry Analysis.
Why Porter’s Five Forces Model?
Porter’s five forces gives a good indication of the relative attractiveness of the industry. It is a strategic marketing model with which the entrepreneur is able to adjust an industry’s strategy on the attractiveness of the market. It can also be an important component of the marketing plan.
How does Porter’s Five Forces Model look like?
According to Porter, the five powers that determine the manner of competition are the following:
1. The power of suppliers;
2. The power of consumers;
3. The degree to which substitutes and complementary goods are available;
4. The threat of newcomers into the market;
5. The internal competition of players on the market.
Power of suppliers
Are there many suppliers active on the market or few? Few suppliers often have more influence than many suppliers who compete with each other. Which influence do the suppliers have upon the industry? Are there high costs associated with switching to other suppliers? To what degree is the product standardised? Is it possible to go producing the product on one’s own? These are the factors that have influence on an organisation’s negotiating position. The negotiating position between the business and supplier has a significant contribution in the attractiveness of an industry. It has influence on the price-setting, quality and continuity of the organisation.
Power of consumers
What is the customer’s negotiating position? Research the following factors: Portion of the overall market turnover that is gained per customer A better price can often be stipulated in high volume purchase What kind of urgency does the customer have in buying the product? If the purchase of a product is really important for a consumer, then immediately nothing less will be accepted. If the importance is really low, then a substitute often does not matter. To what degree is the product standardised? Homogenous or Heterogenous? Are there high costs associated with switching to another provider (and competitor)? The added value for the consumer. What is the yield for the customer? Does one get 100 or 200 call minutes for 10 Euro? Is it possible to go producing the product on one’s own? The degree to which a shopper is informed. Consider, for example, the prices and the costs. These are a number of factors that exert influence on the customer’s negotiating position. The negotiating position between a business and customer has a considerable contribution in the attractiveness of an industry. It has influence on the price-setting, quality and continuity of the organisation.
Degree to which substitutes and complementary goods are available
Are there many replacement/substitute obtainable or few? Think, for example, of the bus: it is a substitute for a train. According to Porter, a substitute is especially threatening when it comes with a clear price-performance ratio improvement.
Threat of newcomers
To what extent is it possible to enter a market? This is influenced by the following factors: Economies of scale, existing providers often enjoy economies of scale through which they create lower costs. Capital, in some markets there is a need for a very huge amount of capital for newcomers to start. Think of a hospital. Conversion cost, are there high costs associated with converting to new products? Access to distribution channels, it is not always easy to enter the sales channel. Think of a supermarket. Government, government can oppose or prevent entrants Established brands, it is difficult to compete with big established names There is no entry into the distribution channel These are a number of factors that determine the degree of threat that newcomers form. Internal competition on the market What kind of influence does the competition have on the market?
The degree of competition in a market.
Is there an intense competitive struggle going on or is there completely zero competition in the form of a monopoly? The degree of internal competition is an important indicator of a market’s attractiveness. After researching these five forces, it is possible to conclude a number of important opportunities and threats. These are included in the Industry Analysis and SWOT.