Porter’s five forces is one of the most important models for business. In this model, Michael Eugene Porter discussed the competitors winning strategy. In this strategy, you know everything about how to protect your business and enhance your profit. How to get more profits and make your business model best so everything will be going on the good side. So without a delay let’s get into it.
In the light of
- Understand Porter’s Five Forces
- Model of Porter’s Five Forces
- Porter’s Five Forces Analysis
- Limitations of Porter’s Five Force
- Frequently Asked Questions
Understand Porter’s Five Forces
In 1979, this model was published in the Harvard Business Review for the first time. After that, the business will start thinking about this porter’s model.
Definition of Porter’s Five Forces
It is basically a model, where it introduced the 5 strategies. When some companies suffer from loss and sometimes unattractive because of rivalry or the rest of 4 reasons. Which I will talk about after some time. For example, airlines are one of the most important in our world but it has a high fixed cost with less profit. In this case, airlines mostly depend on the customer, if they buy tickets or not? Here comes the strategy that introduces the overall process.
Let’s take a look at the, what is porter five forces? So, there are 5 points introduced by the porter.
- Threat of new entrants
- Threat of substitutes
- Bargaining power of buyers
- Bargaining power of suppliers
- Industry rivalry
Although, these 5 strategies described the different factors. So you need to know about everything that you apply for your business as well.
Model of Porter’s Five Forces
In the porter’s model, some major facts that display in front of us and we need to analyse those factors that are most important. Firstly, look at the overall main factors that porter’s talk about. Which are
- Influence the bargaining power
- It is also simplified the microeconomic theory
- Helps to understand the long-run rate of an industry
- Helps to understand the growth rate of a specific industry
- Ability to understand the imperfect markets that affect the business
- Sellers switching costs
- Power of distribution channels
- Products differentiation
- Network impacts
- Informational availability of buyers
- Understand the competitive forces in work
- Porter’s forces focus on environment analysis rather than SWOT analysis.
If you think that, only a business model enhances the business. Also, the overall supply chain, operations, distribution and sales and marketing, these all improved the business so you have to look here for ultimate information. You need to understand the importance of porter’s five forces.
Porter’s Five Forces Analysis
Above you can see the different factors, now that I will go to discuss.
Threat of New Entrants
In this model, porter talks about all the threats that face the new startups.
Now I will tell you in detail. If you think to start a business what will you choose? Maybe the most profitable sectors. But let you know that every industry has profit and loss both.
You need to look at your potential competitors if they start a business your business will be down. Always track your competitors so the new entrants can not affect the business. If a business starts with small money there is a high chance to create a rivalry and give the bargaining power to buyers.
In this case, you need to secure your business by creating the entry barrier. You can make differentiation of your products. You also can do cost leadership. For example, Apple is doing the differentiation management. There are no competitors in the market who compete with Apple.
Threat of Substitutes
Next is substitutes. You need to look at your market and if you can find any alternative then look for product management. You need to create the most specific product that does not have any alternatives. If you already have a business then you can do internal differentiation. Also, you can use patents so new entrants or your competitors can not use your speciality.
If you are just starting your business then you need to do some research and fill your product-specific quality. You also can do product development or develop technology where you can take some government scheme. Find out the most relevant government scheme that protects your business.
In an example, if there are a lot of rivals or competitors in your industry, then still you have an opinion to create unique products. In this way, you can provide a valuable addition to your customers.
The Bargaining Power of Buyers
In this model, porter discusses the power of the buyer. If you are not the best in your industry then the buyers have an option to purchase in discount rates. In the market, if there are a lot of competitors and they provide the same type of products then your business will definitely suffer. You do not allow your customers the buying power. Here the bargaining power or buying power means difficulty for the business. You have to take the power of your products in your hand.
The Bargaining Power of Suppliers
Now, this is important to realise that if you do everything such as you maintain your product differentiation, control the alternatives but your suppliers have the power of buying then again it is not good for business. You have to choose the suppliers oriented industry where you can find multiple suppliers.
Example, guess you have a specific type of product manufacturing company and you need specific raw materials and you have only fewer suppliers who provide the materials. In this case, your suppliers can charge a high amount, they have the right to create their own price range. In this situation, you don’t have many options to switch to another.
So here porter’s theory tells the power of your suppliers which is the threat of a company. You must use multiple distribution networks so your business has several options to reach your consumer.
So now you also look at the competition in the market. In this theory, one can choose the differentiation, but if there is already a strong competitor then the rivalry goes up. For example, the clothing manufacturing industry. In this industry, everyone wants to present their best dress and sell their dresses.
In this case, you also realise that you have several alternatives to choose from. So here previously two threats also include here, one is the bargaining power of buyers and substitute threats. Where the company has to sell the products with discounts and also don’t have many alternatives to make the company differentiate. I hope now you realise, why the rivalry goes up? If a company manufactures dresses, they can not sell higher prices because of the rivalry. In this rivalry situation, one company also needs higher investment so the company continues to work.
But overall it has less profit. Porter’s rivalry theory is a clear definition of industry rivalry. So make sure you don’t put yourself in the competitive industry if you have an existing business then you need higher investment and also need to differentiate your products. As I previously discussed about it.
Limitations of Porter’s Five Force
Everything has a good side and some disadvantages as well. Here is also the same. Porter’s five forces also have some limitations. Such as
It oversimplifies the industry value chain. (Value chain” Internal link to the vertical integration page) every industry has the system that buyers can be used in different segments. They need to differentiate by middleman and different channels.
Porter’s theory also felt to link with overall industry management. If a company has a low influence then how are they set to use them all five forces?
Also, Porter’s forces analyse the specific micro-niche but it ignores the broad or macro niches. Mostly some companies deal with the macro niches and achieve success. Geographical growth is one of the best parts to expand the business.
( geographical growth” internal links to geographical integration page)
This theory also minimized the industry mindset. Because it is especially analysing the one and one company expansion rather than the industry development.
Porter’s five forces another limitation that comes out which is self-orientation. In this case, porter rarely focuses on the dynamic industry rather than the specific company where anyone can develop specific products.
It is also focused on the over branding. Because if you use the technology and want to differentiate with others then it is very difficult to create something totally new. It needs huge money. However, Apple used to differentiate the overall work still new entrants face the problem with it.
Regardless, we accept the logical limitations are there in the model but still, we believe this model is a most important framework. It focuses on some major problems within the industry. So every new entrant and existing business uses those techniques.
At last, if we need to take a quick overview of the porter forces. There are some important strategies we can see, although this strategy has some limitations. Still, from industry rivalry to buyers bargaining power all are important. The company needs to focus on the two main factors which are buyers and suppliers bargaining power. If these two are in control and well managed then any company can survive the industry. So if you started a business then you need to answer all strategies and if you have an existing business then you also create some differentiation in your business so that your business will continue for a long time.
Frequently Asked Questions
- What is Business Strategy?
Answer – Business strategy comprises some techniques which are used for business growth.
- What is PESTLE?
Answer – PESTLE stands for the political environment, economic, social environment, technology, legal and ecological environment. These six methods analyze for business growth.
- Advantages of Porter’s Forces?
Answer – Most important advantages are it defines the overall micro niches sectors, analyse the sectors and implement the strategies.
- Disadvantages of Porter’s Forces?
Answer – Disadvantages and all limitations are the same. Porter’s forces have some limitations but most important is it focuses on the micro-niches, company-specific targets not the industry related. As I discussed in this blog.