PORTER’S FIVE FORCES THEORY
Use to summarise your current competitive situation.
Michael Porter’s five forces theory is a framework for organisational analysis and business strategy development. Porter outlines five forces that determine competitive intensity and therefore the overall profitability of a service or product.
PORTER’S FIVE FORCES:
Threat of new entrants: Profitable markets that yield high returns will attract new entrants. This will eventually decrease profitability for all organisations in that sector.
Threat of substitute products or services: The existence of improved versions of your product and substitute, or near substitute, products increases the likelihood that customers will switch to alternatives – especially if they are cheaper or easier to access.
Bargaining power of customers: The ability of customers to apply pressure on the organisation, including resistance to price rises, increases when organisations supply a small number of big customers.
Bargaining power of suppliers: The ability of suppliers to charge excessive prices increases if there are a limited number of suppliers in the field.
Competition within the sector: For most organisations, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry.
HOW TO USE IT
- Look at each of the forces and analyse the strength of your current competitive position and identify the position you would like to be in (see Theory 67).
- How easy is it for customers to move suppliers? Keep one step ahead of your competition by improving what you offer or lowering prices to make substitution uneconomic. Aim to give your customers what they don’t know they need by listening to your frontline staff (see Section 10).
- Do you have a few very large customers? How easy would it be for them to drive your prices down? If you deal with a few powerful customers, they can dictate terms to you, and you need to broaden your customer base.
- How easy is it for your suppliers to drive prices up? Can they hold you to ransom because they are sole suppliers of a product or service? Is it possible to switch suppliers? The fewer suppliers you have the more you are at their mercy. Find ways to broaden your supplier base. Start with the internet. Overseas suppliers are just a click away.
- How strong are your competitors? If you have many competitors, and they offer equally attractive products and services, then your customers will move if the competition can provide a better/cheaper service. Keep a close watch on the quality of your products and services (see Section 10) and prices (see Theory 83) to make sure you maintain your competitive edge.
QUESTIONS TO ASK
- When was the last time I methodically reviewed my team’s competitive position?
- How can I differentiate my products or services from those of my competitors?