Having a clear idea of who your competitors are and how their product offerings affect your overall business is an essential component of success in this day and age.
Porter’s Five Forces is a simple framework that helps you understand the main sources of competition in your field and identify areas of improvement to stay ahead of your competition.
In this article, we will tell you what Porter’s Five Forces model is all about, break down each component of this framework, and provide real-life examples of where this research strategy has proved to be extremely useful for companies.
Understanding the Framework: What Are Porter’s Five Forces?
Simply put, Porter’s Five Forces refers to the strategic framework that companies can use to identify and analyze the competitive nature of their industry.
Developed by Harvard Business School professor Michael Porter, this framework focuses on providing five key factors that could affect a company’s profitability in any given industry. According to him, the following factors are what shape the competition in your field:
- Threat of new entrants
- Bargaining power of suppliers
- Bargaining power of buyers
- Threat of substitute products or services
- Rivalry among existing competitors
Following this kind of framework is extremely helpful when it comes to starting a new business and trying to understand the competitive landscape of an industry.
More specifically, thoroughly following Porter’s Five Force framework helps you get a comprehensive industry overview, understand insights on potential profit distribution, and analyze the overall structure of the industry you are building your business.
Porter’s Five Forces in Action – How Can They Help You Analyze the Depths of Your Industry?
The primary idea of Porter’s Five Forces framework is that it introduces various aspects to take into consideration when it comes to analyzing your market.
These forces collectively can help you determine the potential profit you might have in a certain industry. Therefore, you can decide how attractive it is to get in. That’s why it is important to analyze each force in detail to make accurate assumptions and plan your strategy accordingly.
Let’s take a look at each one of Porter’s five forces, check how each component contributes to the overall analysis, and see how the PRNEWS.IO tool can help with the research.
Force 1: Threat of New Entrants
The first force is all about understanding the likelihood of new companies entering the specific industry.
Generally, when the market shows good promise and becomes profitable, there are lots of companies and individuals who want to jump on the trend, invest their resources, and get their share of the pie.
This is especially relevant if there is a low barrier to entry, making it easy for new entrants to get their market share and decrease your profitability.
To fully analyze this matter, think about the associated costs and time it would take for new competitors to enter your specific market. Also, what are the barriers to entering? Are there any regulations to get started?
Most importantly, is your technology protected from being easily copied and replicated by the new competitors?
How Can PRNEWS.IO Help?
If you are the new entrant to the specific industry, PRNEWS.IO can help you quickly build brand awareness and credibility through targeted media placements, helping you overcome initial barriers to entry.
Force 2: Bargaining Power of Suppliers
After understanding the barriers to entry, it is important to consider how much third-party vendors impact your profitability and position in the market.
Choosing reliable suppliers is important because they offer inputs that help you operate in the market. However, you must understand that if their bargaining power is high, they might set higher prices and impact your business whether or not you want it.
Their bargaining power is generally high when you have a low amount of suppliers to choose from. That’s why you must always be on the lookout for new options, just in case conditions change.
In this step, it is essential to identify who are the key suppliers in your market? How many other similar solutions are there? And how expensive is it to switch suppliers?
How Can PRNEWS.IO Help?
By using PRNEWS.IO to distribute content about alternative suppliers or innovations, companies can reduce dependency on powerful suppliers, there by decreasing their bargaining power.
Force 3: Bargaining Power of Buyers
Getting the suppliers in order leads us to learn more about our customers’ bargaining power – do they have the ability to demand lower prices for the products and services we offer to them?
If the number of potential customers is relatively smaller in your market and they have many providers to choose from, they get more power to demand lower prices and high-quality service from your company.
Even more so when the company’s revenue stands on certain customers (more applicable for B2B businesses), those are the buyers that have high bargaining power on the market.
This is where the customer acquisition and buyer switching costs are extremely applicable for your business’s success.
What is the ratio of buyers and sellers in your industry? What is the general size of a single order? Is it easy for buyers to switch between the sellers? – answering these questions will help you understand the power buyers hold on your market.
How Can PRNEWS.IO Help?
PRNEWS.IO enables businesses to highlight unique value propositions through strategic content distribution, which can diminish buyer power by fostering brand loyalty and reducing price sensitivity.
Force 4: Threat of Substitute Products or Services
This force pushes us to think about the competition from other industries – how likely are your customers to make a switch from your product to a substitute product that offers the same benefits?
For example, should local restaurants be afraid of new bakeries that might be opening in the nearby areas?
In case alternative products meet your buyer’s needs, your industry automatically becomes limited on how it can set prices and conditions.
That’s why it is important to constantly be offering new products, diversify your offerings, and make your brand appealing to your customers so they never think about getting a substitute for your solution.
What types of substitutes exist in your industry? Which set of functionalities do they have that are similar to yours? How affordable are these substitutes?
How Can PRNEWS.IO Help?
Through PRNEWS.IO, companies can differentiate their offerings by emphasizing unique features or benefits in the media, making substitutes less appealing to consumers.
Force 5: Rivalry Among Existing Competitors
Finally, understanding your competitive rivalry is important to determine the intensity of competition between the main rivals in your market.
There are lots of variables that play out in this scenario – service, quality, price, branding, customer satisfaction, and more.
The less product differentiation there is, the more intense competition arises between the companies in the same field. This affects the overall industry growth and results in less profits for the companies.
In order to have a full awareness of rivalry, determine the number of your direct competitors and understand the growth rate of the overall industry.
How many competitors are currently in your market? Which one is the biggest competitor? Does your product have many differentiators that make it more unique for the customers?
How Can PRNEWS.IO Help?
PRNEWS.IO provides a platform for companies to consistently communicate their strengths and innovations, helping them stand out in a crowded market and mitigate the intensity of competitive rivalry.
Real-Life Examples of Porter’s Five Forces
Now that you have an idea of the different aspects of Porter’s Five Forces, let’s have a look at some examples that will give you some clarity on how these components play out in real life:
Apple: Bargaining Power of Buyers
Have you noticed how Apple is able to launch a new iPhone every single year, put ridiculously high prices, and still get record sales?
Well, that’s because of the simple fact that their operating system (iOS) and products are distinctive from those of the others.
Since they are the only ones offering this unique system and the number of their loyal fans is quite high, the bargaining power of buyers is low, and, as a result, Apple can get away with charging high prices on their products.
Spotify: Bargaining Power of Suppliers
The world’s leading music streaming platform, Spotify, heavily relies on external providers in the music business. They need to negotiate every single detail with large record labels and popular artists to be able to function as a business.
Suppliers have the power to limit the availability of their content on Spotify and grant exclusivity to other platforms if they wish so.
This reality puts Spotify in a situation where they must negotiate long-term licensing agreements with artists and continuously maintain good relationships with music labels to ensure the success of their business.
Implement Porter’s Five Forces Framework With PRNews.io
PRNEWS.IO helps companies strengthen their brand presence and market position by offering access to a vast network of media outlets for content distribution, a key factor in managing competitive forces.
Sounds interesting? Take a look at the list of our news sources for your potential placements, and get in touch with us if you have any questions.
