No matter which industry your business is in, you can assess the forces that influence your business, including its strengths and weaknesses, using this set of five Market Forces, in order to leapfrog over your competition by better understanding the industry you and your rivals operate in.
Created by Harvard Business School professor Michael Porter to analyze the attractiveness and likelihood of profitability of an industry, Porter’s Five Forces are a simple but powerful tool for understanding where power lies in any business situation. Using this tool, you can gain insight into the competitive strength of your current position as well as one you’re considering moving into.
In this way, you can take fair advantage of situations of strength, improve weaknesses, and avoid missteps.
While these Five Forces are typically used to determine whether new products, services or businesses may be profitable, you can use them to analyze any “balance of power” scenario, including key strategies in your marketing plan.
How to Use Porter’s Five Forces
The Five Forces that determine the balance of power in any business situation are:
- Supplier Power. How easy is it for suppliers to drive prices up? The answer depends upon the number of suppliers of each key element, how unique their product or service is, their ability to control you, the cost of switching from one to another, and so on. The fewer your choices, and the more you need their help, the more powerful your suppliers are.
- Buyer Power. How easily can your buyers drive prices down? As in Supplier Power, the answer depends upon the number of buyers, how important each buyer is to your business, what it costs them to switch from your products or services to a competitor’s, etc. If you only have a few buyers, they can exercise a lot of control over you.
- Competitive Rivalry. The key here is how many competitors you have and what their capabilities are. If you have a lot of competitors that offer equally attractive products and services, then you’ve probably got very little power. If suppliers or buyers don’t like the deal they get from you, they’ll go to someone else. If no one else can do what you do, however, you may have a lot of strength.
- Threat of Substitution. Can your customers find another way to do what you do? Can they hire people to do what your product does? Can they hire developers to re-create your software? If it’s easy and viable for them to substitute something or someone for your product or service, your power is weakened.
- Threat of New Entry. How easy is it for new players to enter your market? If it doesn’t cost much money or time for someone else to start a business and compete with you (low barriers to entry), if you can’t gain or haven’t gained advantages via expansion such as lower-priced supplies (economies of scale), or if your key technologies aren’t well-protected or can’t be, then new competitors can quickly enter the market and destabilize your position. On the other hand, with strong barriers to entry that you can defend, then you can keep your position of strength and use it to your advantage.
To use Porter’s Five Forces to assess the balance of power in your business situation, start by examining each of these forces individually.
Think about the factors that are relevant for your market or situation, and then check them against those in each Force.
Download a copy of this diagram and mark your key factors for each Force. To characterize the size and scale of each Force, use a plus sign for any force that’s moderately in your favor, two pluses for any that’s strongly in your favor, and a single or double-minus sign for any force moderately or strongly against you respectively.
Next, brainstorm opportunities. Where can you further leverage a Force strongly in your favor, bolster one that’s a moderate advantage, or shore up weaknesses? Does one area require a rethink in order to change the balance of power?
At first blush, it may not be readily apparent where branding or marketing strategy’s role is in this tool, but if you consider “quality differences” in Competitive Rivalry, you’ll realize that this is where brand has the most impact. “Quality differences” is a catchall area that can also encompass other value-adds such as brand affinity, “stickiness” and customer service, all of which have a huge impact on “customer loyalty,” also in this category.
Consider the Coke vs. Pepsi rivalry and the point becomes clear. Two simple products—I always like to refer to them as “brown, bubbly, sweetened water” to illustrate their simplicity—that have waged brand wafare to the tune of billions of dollars. The Coca Cola logo is one of the most recognized logos in the world. (Not bad for a can of bubbly brown water.) That alone shows how important perceived quality differences are. They can make or break a brand.