Competition management is at the core of strategy formulation, but business leaders often fail at it because they view competition too narrowly and negatively. Understanding of the underlying sources of competitive pressure provides the groundwork for a strategic action plan. With our Porter's Five Forces Analysis presentation you can assess and analyze customers, suppliers, potential entrants, substitute products and rivalry companies and conquer competition fully armed.
Common challenges in applying Porter's Five Forces Analysis include: understanding the complexity of the model, lack of accurate data, and the dynamic nature of business environments. Overcoming these challenges involves: investing in training to understand the model, using reliable sources for data collection, and regularly updating the analysis to reflect changes in the business environment.
Porter's Five Forces Analysis aligns with strategy formulation by providing a framework to understand the competitive forces in an industry. It helps in identifying the strengths and weaknesses of a company, and thus, formulating strategies to leverage strengths and mitigate weaknesses. The five forces - competition in the industry, potential of new entrants into the industry, power of suppliers, power of customers, and the threat of substitute products - all play a crucial role in determining the competitive intensity and attractiveness of an industry. By understanding these forces, businesses can develop strategies to gain a competitive edge.
The following slides explain the Five Forces of the Porter's framework, according to the model developer Michael Porter himself.
Threat of New Entrants implies that the threat of new entrants into an industry can force current players to keep prices down. Entry brings new capacity and puts a cap on the profit potential of the industry.
Threat of Substitute Products or Services implies that when a new product or service meets the same basic need in a different way industry profitability suffers. (Email is a substitute for express mail).
Bargaining Power of Buyers implies that powerful customers can use their clout to force prices down or demand more services at prices that are already set, capturing more value for themselves.
Bargaining Power of Suppliers implies that suppliers can use their negotiating leverage to charge higher prices or demand more favorable terms from industry competitors and lower profitability.
Rivalry Among Existing Competitors implies that if the rivalry is intense, it drives down prices or dissipates profits by raising the costs of competing. Companies compete away the value they create.
Expert advice
In his article for Harvard Business Review (HBR), the framework developer Porter offers his advice on formulating strategy, based on the model analysis.
Positioning the company – "The first approach takes the structure of the industry as given and matches the company's strengths and weaknesses to it. Strategy can be viewed as building defenses against the competitive forces or as finding positions in the industry where the forces are weakest."
Influencing the balance – "When dealing with the forces that drive industry competition, a company can devise a strategy that takes the offensive. This posture is designed to do more than merely cope with the forces themselves; it is meant to alter their causes."
Exploiting industry change – "Industry evolution is important strategically because evolution, of course, brings with it changes in the sources of competition I have identified. In the familiar product life-cycle pattern, for example, growth rates change, product differentiation is said to decline as the business becomes more mature, and the companies tend to integrate vertically."
Multifaceted Rivalry – "The key to growth – even survival – is to stake out a position that is less vulnerable to attack from head-to-head opponents, whether established or new, and less vulnerable to erosion from the direction of buyers, suppliers, and substitute goods."
Case study
Facebook, Inc.
Forbes analyzed the social media giant, Facebook, using Porter's Five Forces Analysis. Here's what was concluded:
Competitive Rivalry Within The Industry – many industry players from full-featured platforms, such as Google+ to niche social networking sites and new mobile apps can affect Facebook's user base growth. Also, as the social networking space is prone to innovation and the introduction of new tech, Facebook's massive user base can never be taken for granted. Plus, companies that allow marketers with targeted advertising and new development platforms for application developers should be considered competition as well.
Bargaining Power of Customers – providing a satisfying user experience is key for gaining and retaining customer base on social networking platforms because while users of social networking platforms hold high bargaining leverage, the same is limited for marketers (personal data safety, fake news and trolling has been hurting the platform user experience the most in the recent years).
Threat of New Entrants – with mobile landscape rapidly evolving, new players will be entering the market, as the internet business is characterized by especially low barriers to entry. However, success is impossible without the resources required for marketing and for gaining brand recognition, and Facebook is way ahead in terms of the resources.
Threat of Substitute Products – new alternatives to Facebook are emerging constantly with several social networks catering to specific interests such as cooking, DIY, gaming, etc. and their popularity could impact engagement levels on Facebook-owned properties, such as Instagram and WhatsApp.
Bargaining Power of Suppliers – certain software and hardware providers (servers, storage, power, software, data center and office equipment, technology, etc.) may hold moderate bargaining power over Facebook.
