Porter’s five force analysis was developed by Michael E Potter of Harvard Business School in the year 1979. It was developed as a simple framework for assessing and evaluating the competitiveness of a business establishment by analyzing the strength and position of the company. Michael Porter had designed many vital frameworks for organizational strategy, but Porter’s five force model received the most fame and is implemented till date.
What are the five forces of competition?
In the words of Porter, the nature of any competition in an organization can be epitomized by the following five points:
- Bargaining power of suppliers
- Bargaining power of buyers
- Threat from potential new entrants
- Threat of substitutes
- Rivalry in the industry
Michael Porter’s five force model
What is the meaning of competitive forces?
Porter’s competitive analysis model explained
- Threat of new entrants: Your monopoly or the share you enjoy in a market can be greatly impacted if it is easy for your competitors to enter the market. If the entry into your market is easy, in other words, there are only a few economy of scale; then your position in the market is at risk. If your key technology is easy to substitute then the chances of new entrants coming into your market and weakening your position becomes considerably more.
- Bargaining power of customers: Over here you determine the capacity of the customer to bargain the price of your product. Here, you look at the options available to the buyer, how easy is it for your buyer to switch from your product to the competitors. If you are doing business with only a few buyers, who are powerful and provide the most revenue to your company, in such a case the buyer can always dictate the price to you.
- Threat of substitutes: If your competitor is selling the same product you are selling, this can pose a serious threat as any major change in the product or the price can motivate the consumer to migrate from your product to the competitors. A few examples – if you are selling something that can be substituted by your competitor or can be done manually, the customer could move away from your product to doing it manually as it would cost less.
- Bargaining power of suppliers: The force analysis takes note of how much power the supplier has to escalate the price of the raw material, this can happen when the number of suppliers is limited and the material they are supplying is rare and difficult to obtain; in a situation like that the supplier would have dominion over the price and ultimately you.
- Competitive rivalry: The important thing here is the number and the capacity of the competitors. If the number of competitors is very large and all of them offer goods and services that are on par to what you offer, then in such a situation you will have little power over the buyers and the suppliers, if they are not satisfied with you then they could abandon you without a second thought. But, if the situation was reversed then you would almost enjoy a relevant monopoly in the market.
Case study using Porter’s five force analysis
Apple enjoys a good market share; but, its strategy is mostly addressing the external business environment. It faces a stiff competition in the range of product it markets. Apple has created a unique brand symbol that’s recognized by the customers. Porter’s five force analysis of Apple:
Competitive rivalry: Apple faces a strong force of competition from rivals like Samsung, Sony, Microsoft.etc, the competition comes in the form of innovation, aggressive advertising, and imitation. The low price offered by competitors makes it easy for customers to switch from Apple to its competitors. This part of Porter’s five force model shows that rivalry is a serious factor for Apple.
Bargaining power of customers: The bargaining power of Apple customers is strong as it is very easy for them to switch from Apple to its rivals, so Apple has to ensure complete customer satisfaction; on the other hand at the individual level the customer’s power is weak as each buyer forms a very minute portion of Apple’s total revenue.
Bargaining power of suppliers: The force of suppliers is weak as Apple has many options around the world. Currently, Apple has less than 200 suppliers but if it chooses it can dump any supplier whenever it desires. So, this part of Porter’s five force analysis proves that Apple doesn’t need to worry about the bargaining power of suppliers.
Threat of substitutes: In this area, the substitutes have a weak force, even though a lot of substitutes are available like – a customer can use a digital camera instead of iPhone or use a landline instead of Apple phone but the experience won’t be the same. Thus, Apple doesn’t need to worry about the substitution.
Threat of new entrant: inApple has a very moderate threat from new competition entering the market as to compete with Apple a company would require a huge amount of capital and not to mention the technical experience and advanced technology.
Porter’s five force analysis is a very important tool for assessing the risk a business could face in the future, it analyses all the parameters that are present and gives a glimpse into the future; providing the managers with enough information to take precautionary measures.