Applying Porter’s Five Forces To Your Business & Product by Wayne Chen Pocket Square Media

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Consulting Toolkit Series By: Wayne Chen, @MobiWayne

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Competitive Rivalry

Threat of New Entry

Buyer Power

Threat of Substitution

Supplier Power


¡  A framework that helps you identify where power lies in most business situations.

¡  Useful to understand both the strength of your current competitive business or product situation, and the strength of an opportunity that you are seeking to move to.


Competitive Rivalry

Threat of New Entry

Buyer Power


Supplier Power

Threat of New Entry •  Time & cost of entry •  Cost advantages •  Tech protection (IP/Patents) •  Economies of scale •  Specialist knowledge

Supplier Power •  # of suppliers •  Size of suppliers •  Service uniqueness •  Cost of switching or

substitute

Competitive Rivalry •  # of competitors •  Quality differences •  Switching costs •  Customer loyalty •  Cost advantages •  Cost of abandonment

Buyer Power •  # of customers •  Size of each order •  Difference between

competitors •  Price sensitivity •  Cost of switching

Threat of Substitution •  Substitute’s Performance •  Quality of Substitute •  Market Share •  Cost of Change


¡  Managers and executives can take advantage of a situations such as strength, weakness areas to avoid costly missteps.

¡  The Five Forces Analysis assumes that there are five important forces that determine competitive power in a business situation.


¡  Assesses how easy it is for suppliers to drive up prices and cost.

¡  Driven by the number of suppliers of each key input, the uniqueness of their product or service

¡  Identifies their strength and control over you, the cost of switching from one to another, and so on.

¡  Suppliers are more powerful if you have fewer supplier choices and require their help.


¡  Ask yourself how easy it is for buyers to drive prices down in the market?

¡  Consider the importance of each individual buyer to your business, the end cost to them of switching from your products/services to those of someone else, and so on.

¡  If you deal with few, powerful buyers, then they are often able to dictate terms to you.


¡  What is important here is the number and capability of your competitors.

¡  Review number of competitors and if they offer equally attractive products or services

¡  Suppliers and buyers can go elsewhere if they don’t get a good deal, meaning little power.

¡  If no-‐one else can do what you do, then you can often have tremendous power in your position for your product or service.


¡  Affects the the ability of your customers to find a different way of doing what you do

¡  If you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it.

¡  If substitution is easy and substitution is viable, then this weakens your power.

¡  Substitution comes in physical forms of replicas i.e. watch manufacturing to store-‐brand items.


¡  Power is also affected by the ability of people to enter your market.

¡  If it costs little in time or money to enter your market and compete effectively

¡  If there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position.

¡  If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it.


¡  Review each forces one-‐by-‐one and write it down.

¡  Brainstorm the factors for your situation, and check against the factors listed.

¡  Summarize the size and scale of the force on the diagram.

¡  A "+" sign for a force moderately in your favor, or "-‐-‐" for a force strongly against you

¡  Review your worksheet and think through how it affects you.

¡  Looking at things in this way helps you think through what you could change to increase your power with respect to each force.

¡  If you find yourself in a structurally weak position, this tool helps you think about what you can do to move into a stronger one.


Competitive Rivalry

Threat of New Entry

Buyer Power


Supplier Power

Threat of New Entry •  Inexpensive entry point •  Some economies of scale •  No tech or IP issues •  Low barrier to entry •  New entry is easy

Supplier Power •  5 suppliers (moderate) •  Suppliers are large and

neutral •  Able to switch or substitute

quickly

Competitive Rivalry •  15 competitors •  Low switching costs •  Low customer loyalty •  Customer loyalty •  High cost to abandon market

Buyer Power •  Few & large retailers •  Large purchase orders •  Online distribution •  Price can be sensitive •  High buyer power

Threat of Substitution •  Some cross-‐product

substitutes •  Ability to import foreign

products


¡  Threat of new entry is quite high §  If anyone looks as if there are

making a substantial profit, new competitors will enter the market easily.

¡  Competitive rivalry is extremely high §  If someone raises prices, they

will quickly undercut. Market competition applies downward pressure on prices from raising

¡  Buyer Power is strong §  Implying strong downward

pressure on prices. ¡  Some threat of substitution

¡  Overall Recommendation §  A tough industry for the

product or service to flourish unless there there is a new way to find to profit.

§  Company may need to specialize in a sector of the market that is protected from some of these forces, or find a related business that's in a stronger position


Porter's Five Forces Analysis is an important tool for assessing the potential for profitability in an industry. It works by looking at the strength of five important forces that affect competition:

§  Supplier Power: The power of suppliers to drive up the prices of your inputs. §  Buyer Power: The power of your customers to drive down your prices. §  Competitive Rivalry: The strength of competition in the industry. §  The Threat of Substitution: The extent to which different products and services can be

used in place of your own. §  The Threat of New Entry: The ease with which new competitors can enter the market if

they see that you are making good profits (and then drive your prices down). By thinking about how each force affects your business, and by identifying the strength and direction of each force, you can quickly assess the strength of your position and your ability to make a sustained profit in the industry for your product or service.


Contact information ¡ Wayne Chen ¡ [email protected] ¡ @MobiWayne or @WayneChenNY ¡  www.PocketSquareMedia.co ¡  Blog: www.Enovaminds.com

Applying Porter’s Five Forces To Your Business & Product by Wayne Chen Pocket Square Media

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