To establish yourself in a market and obtain a significant advantage over the competition, you must be aware of the external factors likely to have an influence on the evolution of this market and, potentially, to threaten your business. Modeled in 1979 by Michael Porter, Porter’s “5 forces” is a strategic intelligence tool that analyzes these factors along 5 axes on the basis of which a company can anticipate and act to optimize its competitive advantage.
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Indeed, after having listed the various points to be studied and having carried out an in-depth investigation in this regard, the company is better equipped to take strategic decisions. which are necessary in view of the competitive situation.
What are Porter’s 5 forces?
- The threat posed by new entrants
- The bargaining power of suppliers
- The bargaining power of clients
- The threat of substitute products and services
- Competitive intensity
Why use Porter’s 5 forces?
Porter’s 5 forces method makes it possible to anticipate changes in the market, during the launch of an innovative product or service, for example. It pushes to analyze the strengths of its company, but also its weaknesses (competitors who have already established themselves in its market, suppliers with whom it will be difficult to negotiate…).
Analyzing the competitive environment of a company makes it possible to detect the key factors of success and to put in place the appropriate development strategies. Using Porter’s 5 forces matrix is an excellent way to be proactive and to put the odds in your favor to anticipate changes in your market.
Although all companies can use it, this tool is particularly suitable:
- In sectors where there are many players.
- In the event of a technological breakthrough.
- When new entrants enter the market.
- In the event of a major change.
Porter’s 5 forces and their use
For a successful analysis of a company’s competitive environment, each Porter’s force must be studied individually. Proceeding in this way makes it possible to check at each stage whether the danger is low, medium or high, while keeping in mind that the greater the danger, the more leeway to act. It is only after proceeding to this step that Porter’s 5 forces can be considered as a whole.
Good to know : these analyzes are generally carried out on the basis of knowledge of the company’s market and documentary research. In addition to Porter’s forces, thePestel analysis also helps to better understand the global environment in which the company operates.
The threat posed by new entrants
It will be more or less difficult for a new company to enter a market depending on the means used by the competition. To know if new entrants may be a threat to your business or not, several questions must be asked:
- What are the barriers to entering the market?
- What is the entry ticket (initial investments)?
- Are there any patents already in place?
- Is it a standardized market?
- Is it a large or small market?
- What market share can be achieved?
Example : In the case of a mobile application that offers sports exercises to be performed at home, it is obvious that new applications can come out addressing the same theme. However, if the application is already known, the threat of new entrants is medium.
The bargaining power of suppliers
Can suppliers impose their conditions? If the answer is yes, then they can pose a danger to the business.
Here is what to think about to assess the risk they represent:
- Are there a lot of suppliers in the market?
- How much does a change of supplier cost?
- Do they have a unique know-how that it is impossible to get rid of?
Example : for the same sports mobile application, the suppliers are the sports coaches. They are more or less numerous depending on the disciplines offered. Their bargaining power is average, because it is possible to find others to replace them. On the other hand, their negotiating power will be important if the application only offers very qualitative, handpicked coaches.
The bargaining power of clients
It is necessary to find out whether customers have a significant impact on prices or on terms of sale. The more customers there are, the less influence they have.
To analyze this Porter’s force, we must ask ourselves:
- How many clients are there?
- Where are they concentrated?
- What is the size of their business (if it is a B2B market)?
Example : still in the case of the sports application, the customers are numerous and spread all over France, even in the world. Their bargaining power is therefore weak.
The threat of substitute products and services
Porter’s 5 forces method should lead to thinking about the threat that competing products or services can pose. Sometimes a competitive offer replaces the service of an older company in the market. This is, for example, the case of Uber which occupies the taxi market.
To check if there is such a threat, you have to ask yourself several questions including:
- Can customers easily switch suppliers?
- What are the advantages and disadvantages of these substitutes?
Example : for the sports application, there are many substitute products. These include fitness videos available on YouTube, classes reserved in person, or books and magazines available on the market. The threat is significant.
It’s time to take an even closer look at your competition. Can rivalry between competitors harm a business? Is competitive diversity important?
To answer these questions, you have to look at the attractiveness of your market and its growth. Do not hesitate to carry out a competitive analysis, to understand the product differentiation of competitors in particular.
Example : the digital sports market is attractive and growing. There are many competitors, but so are customers. The competitive intensity is therefore medium.
How to use Porter’s 5 forces?
The questioning suggested by Porter’s 5 forces tool lends itself particularly well to the following situations:
- you want to boost the development of your business;
- you want to consolidate your market share;
- you want to establish yourself in a new market;
- you want to identify the opportunities available to your business;
- you want to identify the dangers that threaten your business.
The data collected in response to questions raised in applying Porter’s 5 forces should then be carefully analyzed to determine and implement the most appropriate strategies.
In this regard, Porter’s 5 forces can support 3 strategies developed by Michael Porter himself:
- Stand out from the competition: this competitive strategy involves acting on the perceived value of the company’s products and / or services, both in terms of quality and price. This may require recourse to research and development work, calling upon specialists in the matter if necessary.
- Specialize by finding a niche market: competition in such a small market is less important and it is easier to establish leadership there, subject however to showing real expertise and in-depth knowledge of the various players in the sector under consideration.
- Play on prices to attract customers: this strategy requires reducing the costs and expenses of the company, in particular by favoring economies of scale and by optimizing processes (production or other). Without straying too far from the average prices on the market, their controlled fall will attract new customers and therefore boost sales and profits.
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