The analysis of Porter’s 5 forces has been known in marketing for over 40 years, and it was created in 1979 by Michael E. Porter, an economist, teacher and researcher. Porter’s 5 Forces concept is used today mainly by entrepreneurs and specialists in corporate strategy planning.
What are Porter’s 5 forces in marketing?
Porter’s 5 Forces method is used to analyze the business environment of a given company. This model makes it possible to assess the company’s position on the market, as well as to check what the competition is like. It is worth noting that Porter’s 5 Forces is a concept applicable to companies that are just entering a given sector, but also those that have already been in existence for many years or months. The 5 forces consist of the following elements:
– suppliers’ bargaining power,
– the bargaining power of buyers,
– competition within the sector,
– the threat of the emergence of new competitors,
– the threat of the emergence of substitutes.
In fact, the most important feature of this overall analysis is simplicity. You only need to gather information on the five elements and you can create your own model and reflect on your business prospects.
Step-by-step analysis of Porter’s 5 forces
Usually, the marketing analysis should start with the definition of competition within the sector. This way you can find out what other brands are on the market, what exactly they do and how they operate. Usually, it is necessary to analyze the major players, with corporations or big brands not always competing with smaller companies. Sometimes the competition concerns a specific niche or several enterprises from a given sector. The next important step is to analyze the possibility of new competitors entering the market. In this way, companies that can only become new rivals can also be taken into account. The next step is to check whether substitutes can appear on the market, i.e. those goods or services that can replace a given brand. For example, it can be artificial intelligence, which in the future will be able to replace graphic designers and copywriters, as well as machines that are slowly replacing many production workers. Of course, it is also important to know when these changes may take place. In a situation where they are already happening, a given industry may not be suitable for development. Finally, the bargaining power of suppliers and buyers should be analyzed, while in some industries there are no suppliers and the entrepreneur performs most of the tasks on his own. In other sectors, supply chains need to be checked.
What determines the intensity of competition in the market?
Competition in the markets is very volatile and depends on specific sectors. In some industries, competition is growing rapidly year on year, while in others it is declining. Barriers to entry are important here, including the costs and knowledge that entrepreneurs need. In industries with a high barrier to entry, competition is usually lower.
When is it worth doing a Porter force analysis?
Marketing analysis in Porter’s five forces model can be performed in a variety of situations. A classic case is the moment when the entrepreneur is just starting his business, starts activities and wonders how his company is to look like in the near future. Such an entrepreneur must get to know the competition well, understand its methods of operation and possibilities. The second case in which the analysis of Porter’s 5 forces is so important is when a change occurs in a given company, for example, a new strategy appears or a brand enters the market with completely new products. However, it is good to be aware that carrying out only this analysis may not be enough. Usually, it is also necessary to use other methods, such as SWOT.
What are the benefits of carrying out this marketing analysis?
An entrepreneur who knows and understands his competitors thoroughly, and is able to highlight possible problems, such as the appearance of substitutes, can quite accurately predict his development on the market, as well as think about what to do to find a niche that suits him. The analysis of Porter’s 5 forces is not only simple, but also universal, so it fits many sectors of the economy. By identifying opportunities and threats, you can take appropriate steps, such as increasing margins or increasing product prices. In some markets, however, the competition is fierce, so you need to stand out with something. You can lower prices, or increase the quality, or implement some solutions important from the consumer’s point of view. When carrying out Porter’s 5 forces analysis, it is a good idea to pay attention to the concept of the product life cycle. The point here is at what stage the company is at. There are four such stages, namely, introduction, development, maturity, and decline. Therefore, the analysis should be adjusted individually to a given company, its place in the product life cycle, as well as to the specifics of a given industry.