The framework of porter’s five forces help you in understanding and determining the strength and weaknesses of any industry.
It is used to analyze the structure and the strategies that will work out for the business. This framework can be easily implemented in any fragment. It offers the opportunity to know the standards of the competition in your industry, and also helps in increasing the profit percentage.
It is one of the simplest yet powerful tools that can help you in planning the strategy more potentially.
Understanding the Tool
This framework was invented by Michael E. Porter in 1979. He constructed this framework to understand five important factors which he termed as forces. Porter’s five forces framework is a model that helps to explain and determine the factors which assist & preserve the profit of any industry.
This framework was presented in M. Porter’s book in 1980. These five forces are used to identify the rivalry strength, captivating power, and effectiveness of the strategies to acquire maximum benefit. These five forces of Porter act as an important element in constructing a business strategy and drawing long-term benefits to your business.
Michael E. Porter’s five forces are undoubtedly beneficial for shaping the correct path to acquire and retain the maximum benefit. It also helps in building a competitive environment and also offers you to determine the factors which can impact the business. These five forces are:
This force is an important factor that will help you in determining which industry is more fruitful and competing. When your industrial competitors offer the same products and services, then it results in less profit. As a result, you need to compete more efficiently and effectively. The competition becomes more fierce and strong, when:
- There are abundant industrial rivals.
- Growth is slow.
- All competitors have the same strength and power.
- The same products or services are offered.
- Consumer switches the brand frequently.
The power of any supplier is identified through its sale rate. The more efficient & skilled the seller is about its product or services, the good amount of profit can be made.
Supplier is strong when:
- The number of buyers is more as compared to the suppliers.
- When the supplier has the assets which are provided by the limited suppliers.
- When you have the various substitutes for raw materials.
Buyer power is strong when you have numerous suppliers in the industry.
If the buyer has the ability of bargaining the cost of the product or asking for the more qualitative product on the same rate then it results in less profit or reduced earnings for the supplier.
Buyers can be powerful only when:
- When the number of buyers is less.
- When there are many alternatives present in the market.
- Purchasing or acquiring a handsome number of products or services.
- When your industrial rival is offering the same service or product at a lower cost.
- When the buyer is more conscious about the cost of the service or product.
The threat of an Alternative
This factor also plays an important while determining and planning the strategy.
This factor is more dangerous when you know that the buyer can easily move to another product just because the buyer is cost-sensitive.
This factor is also cautionary when you have several industrial rivals and the buyer can easily locate the alternative of your product or service cost-effectively.
The threat of New Entry
More the competitors, less will be the profit benchmark.
When the business is more rewarding than it has fewer obstacles but in their aggravated forms.
Risk of new entrepreneurs in the industry could be high, when:
- The investment amount is less to start the business.
- Current competitors do not exhibit substitutes, quality, or does not have the proper brand visibility or reputation.
- Products or Services offered by all are the same.
- Customers can easily switch companies for acquiring the same products or services cost-effectively.
Strategies for Success
Once the examination of all the factors is accomplished, then it’s high time to plan and implement the brand new strategy for amplifying the competition. M. Porter determined 3 basic strategies that can be used by any well-established company or by a new start-up. These strategies are as follows:
Your main motive should be to increase the profit percentage.
This can be achieved by 2 methods. These are:
- To keep the minimum cost of the product or service while keeping the basic industry prices.
- Increase the market share by decreasing the actual price of the product or service, to maintain the profit percentage.
If you conducted a comprehensive and detailed analysis of the products and services which are offered by your competitors, then you can easily decide what to do or what not to do.
It is easy to get differentiated in the industry. You need to offer better quality products or services as compared to your rivals.
To decide which industry you should step your foot in, requires deep research and understanding of the industry.
The things which you need to examine carefully and intensely are:
- Industrial Rivals.
- The Suppliers.
- It’s Buyers.
Benefits of Porter’s Five Forces
The analysis of Porter’s five forces or factors will help the entrepreneurs or existing competitors to determine the correct and actual factors for acquiring more profit.
These factors can help you in numerous ways, like:
- To decide the industry in which you want to start or switch business.
- To enhance the scope of your brand in the industry.
- To analyze and evolve a competing game plan.
Porter’s five forces make a beneficial mechanism which helps you understand all the in and out of the industry. It also helps you in implementing new or amending the old strategies according to the competition requirement.
These forces also help you in acquiring the maximum percentage of profit and retaining the same percentage for a longer period. One can easily asses the strength and power of each force and can then implement it accordingly to achieve the desired results.