Porter’s Five Forces analysis is a framework for assessing the level of competition within a certain industry. This model is useful for evaluating an industry’s weaknesses and strengths by identifying and analyzing five competitive forces that shape every industry.
According to this framework, competitiveness does not come solely from competitors. Instead, the state of competition in a given industry is determined by five fundamental forces:
Understanding Porter’s Five Forces and how they apply to a particular industry can help a brand adjust its business strategy accordingly. For example, you could take full advantage of a strong market position or strengthen a weak one, all while avoiding future mistakes.
Both Porter’s five forces and SWOT analysis are analytical techniques used by brands to make strategic business decisions.
Although both of these models define a brand’s position in the market, the key difference is that the five forces model focuses on external factors, whereas SWOT analysis is more focused on the internal conditions of the organization.
Quick Tip – When taken in conjunction with a SWOT analysis, Porter’s Five Forces can help you understand where your brand or business fits into the industry landscape.
The number of competitors and their ability to undercut a brand comes under the first of the five forces. Higher the competition in an industry, the lesser the power of the brand. If a brand’s competition offers better deals or lower product prices, suppliers and buyers seek them out.
Conversely, when the competition is low in an industry, a brand has more power to charge higher prices and set the terms of deals to increase sales and profits.
For example, In the e-commerce industry, competition among major players is very high, as there is no switching cost for customers. The players are constantly competing on the basis of price and factors that influence buyers’ choices such as quick delivery, discounts, and offers, variety, customer service, and much more.
It is not only existing rivals that pose a threat to firms in an industry; the possibility of new entries in the industry also affects competition. The less time and money a brand’s competitor takes to enter the market and become viable, the more vulnerable an established brand’s position becomes.
The severity of this threat is determined by the entry barriers into a particular industry. The greater these barriers to entry, the lower the threat for existing players.
For example, The threat of new entrants in the e-commerce industry is high, as there is very little cost involved in setting up an e-commerce website.
The ability of customers to drive prices down or their level of bargaining power is one of the five forces. Customers have a lot of power when there aren’t many of them and they have a multitude of choices to buy from. Moreover, switching from one company to another should be easy for them.
However, buying power is low when customers purchase products in small amounts, act independently and when the seller’s product is very different from its competitors.
For example, the Bargaining power of customers is very high as there are many players in the market with similar products and there is no switching cost. Buyers prefer the brand that offers the best price among other factors such as product quality and delivery time.
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This force examines how much power and control a brand’s supplier has over the ability to raise prices or lower the quality of purchased goods or services, which in turn would lower an industry’s profitability potential.
The important factors that determine supplier power are the availability of substitute suppliers and the concentration of suppliers. When a company has a large number of suppliers, it is in a better position.
For example, the bargaining power of suppliers is low as there are many suppliers in the market, and therefore the e-commerce brands have the power to choose their suppliers.
The Threat of Substitutes formulates the fifth and final force. This force investigates how easy it is for customers to switch from a brand’s product or service to another.
It looks at the number of competitors, how their prices and quality compare to the business under consideration, and how much profit those competitors make, in order to see if they can cut costs even further. Switching costs, both immediate and long-term, as well as consumers’ willingness to change, inform the threat of substitutes.
For example, the threat of substitutes is very high as there are a lot of sellers with similar products and services, and there is no switching cost for customers.
It is not mandatory for e-commerce brands to conduct a Porter Five Forces analysis, but it is clear that it aids in the future of the business. It will point your business team in the right direction by minimizing threats and weaknesses while maximizing strengths.
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