Analyzing Market Competition: Porter’s Five Forces Model
Porter’s Five Forces Framework for Strategic Analysis
1. Rivalry Among Existing Competitors
It is crucial to understand who your direct competitors are right now. Not all companies that sell the same product compete directly. Although working with chocolates, for example, Cacau Show and Copenhagen do not focus on the same target audience.
In this context, it is necessary to understand several points to assess the intensity of rivalry:
- Who are the direct competitors, and how can you gain a competitive edge over them?
- How are companies grouped? If large groups are already formed, they may possess more power to negotiate with suppliers.
- Are their brands already consolidated, admired, and respected? It is always beneficial to understand the reasons behind their success.
- What are the competitive advantages of competitors? Do they have lower costs, achieve higher margins, are they well located, or do they have high customer loyalty rates?
2. Threat of Substitute Products or Services
One of the biggest mistakes an organization can make is believing that if its product is innovative, it has no competitor. However unpublished or unique a product may be, if it solves an existing problem, there must already be other ways, at least in part, of solving the same issue.
To analyze this force, the organization needs to list other products that may offer the same or a similar benefit. For example, a toy entertains and educates a child. What other products do the same? Books, games, movies, and amusement parks contribute to education or entertain children. Therefore, they can be considered substitute solutions to the toy.
3. Bargaining Power of Suppliers
If the organization depends on a few suppliers—especially if the supply is something rare and difficult to find—it will be at the mercy of their decisions regarding prices, deadlines, and quality levels. Problems can worsen if the supplier chooses to exclusively supply a competitor.
More than just answering this question, the entrepreneur needs to reflect on how to secure access to excellent suppliers without relying solely on one or the other.
4. Threat of New Entrants
For a first-time entrepreneur or a small business, addressing this threat can be challenging. However, from the beginning of the business, the organization must think about creating entry barriers.
The entrepreneur should plan measures such as patents, firm (duly registered) trademarks, exclusive contracts, and even the protection of the trade dress to avoid or hinder the arrival of new competitors in their market.
5. Bargaining Power of Customers (Buyers)
At first, this force was traditionally more relevant to companies that sold to a small number of customers, who consequently had significant bargaining power. This remains true today, and it is up to the entrepreneur to seek solutions to avoid dependence on a few consumers.
In the digital age, a single customer can wield enormous bargaining power with a company that sells to millions of customers, especially if they use social networks effectively. In addition to maintaining a diverse range of clients, we must treat everyone with excellence. After completing these analyses, the company must define its strategic positioning relative to its competitors.