When you want to start a business, create a business or even explore new market segments with existing companies, one of the first and most important steps to take is to assess the attractiveness of each segment carefully, and a very useful tool for this is Porters 5 forces model.
The entrepreneur or manager needs to be aware of how variables or market forces governing this segment will positively or negatively affect your business.
Porter 5 forces model was created by the renowned economist, professor and American writer Michael Eugene Porter in 1979. Made up of five variables known as Porter’s forces, this model has been used for more than thirty years by companies worldwide to develop accurate and efficient business strategies.
Dedicated to knowing the background of the external business environment and the degree of attractiveness of a particular market sector, the Porters 5 forces model contains, as follows:
- The rivalry between competitors.
- Supplier bargaining power.
- Customer bargaining power.
- The threat of new entrants.
- The threat of substitute products.
Further down is a more detailed explanation of each.
See also: The concept of SWOT analysis and its wide use as a planning tool and method of administration.
Porter 5 forces model explained
Porter Force 1: Rivalry between competitors
Regarded as the most expressive in Porter’s 5 forces model, the rivalry between competitors is the major determining factor for market competitiveness.
In this regard, one must keep in mind the direct competitors, ie those who sell the same type of product in the same market segment, for the same type of consumers who share common needs or wants.
Quantity and diversity of competitors, as well as marketing and advertising, are situations to be considered.
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Porter Force 2: Supplier bargaining power
Also known as market inputs, but that is not necessarily related to the suppliers of raw materials, as in the case of digital marketing companies that often hire IT professionals or designers as suppliers.
The bargaining power of suppliers lies in some important points, the main one being when a few suppliers largely dominate the sector, then it ends up creating a problematic relationship of dependency.
A supplier with power and influence has an absolute advantage when negotiating amounts, terms and payment, and thus could end up impacting the profit of the client companies.
Porter Force 3: Customer bargaining power
Customer bargaining power is one of the main forces of Porters 5 forces model, because what keeps companies alive is precisely the consumption of the products and services they offer, and more and more consumers demand higher quality at lower prices.
In this way, customers place their competitors under pressure and play against each other. A possible combination of scenarios that gives bargaining power to customers is when, for example, a purchase in a particular industry which has large volumes of standardized products, almost identical, with no major differences.
In this case, there is a price and marketing war among competing companies, aiming to win customers, and profit margins are therefore weakened.
Check out: How to implement customer-centric processes
Porter Force 4: Threat of new entrants
It refers to any barriers to the entry of new competitors in a given market segment. These barriers can affect input or output, i.e., entrances or exits of companies in different sectors.
Besides hindering new companies that are trying to get established in various market sectors, barriers also hinder them when once started, established companies have all of the customers, at least at first.
One of the main barriers or threats to new entrants are the organizations that work with economies of scale, which gives them lower costs, while for incoming businesses these costs are proportionately higher. Other barriers to be mentioned: large initial investment, government restrictions (such as patents, licenses, and subsidies) and difficulty of access to distribution channels.
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Porter Force 5: Threat of substitute products
According to Porters 5 forces model, substitute products are not exactly alike, but meet the same needs of consumers and customers.
It is called indirect competition, which although at first may not be as intense and threatening as direct competition, it has great importance and must always be taken into consideration.
The most obvious case is perhaps of the margarine and the butter, but there are other classic examples of substitute goods that have caused havoc on competitors. One such example is that of typewriters, which gradually ceased to exist with the advent of personal computers.
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