In 1979, Michael E Porter of Harvard Business School developed a model that can be used to evaluate the competitive strength and position of a business organization and this became what is known as Porter’s 5 competitive forces for business strategy.

The Porter’s 5 competitive forces enable businesses to predict their long-term profitability by analyzing the threat of new entrants, bargaining power of suppliers, threat of substitute products or services, competitive rivalry, and the bargaining power of buyers.

Companies that have a strong understanding of the Porter’s 5 competitive forces have a clear knowledge of the structure of the industry which can significantly allow them to establish proper positions.

These positions can guarantee higher levels of profitability and reduces the chances of vulnerability to business attacks.

Porter’s 5 Competitive Forces and Strategy

The need for Porter to develop the 5 forces is because of how managers define competition too narrowly. They mostly look at direct competitors and fail to consider the expansive elements that surround businesses.

The work of a strategist in an organization is to understand competition and find ways to cope with it. direct competitors are just one of the areas that they need to look into.

Description of The Porter’s 5 Model

Porter divided the five forces into horizontal forces and vertical forces. The horizontal forces include the threat to new entrants, the threat due to substitutes, and competitive rivalry.

The vertical forces contain the buyer’s bargaining power and the customer’s bargaining power. Together they make up Porter’s 5 Competitive forces.

Horizontal Forces

Competitive Rivalry

This force determines the intensity of competitiveness in the industry. The more the number of firms in the market the higher the prices. Profits are affected due to the rise in competitive pressure.

This model enables organizations to understand their existing competitors and monitor/look out for them.

High competitive rivalry exists when;

1. Similar types of products are available in a market,
2. Competing companies maintain similar strategies,
3. The growth of the industry is low,
4. Products have identical features offering similar benefits
5. Little to no barriers to the entry
6. When the industry is concentrated
7. When brand loyalty is low
8. When switching costs are low

The threat of New Entrants

Competition is always high when the market is easy to enter for other businesses. New entrants pose new challenges for existing businesses. This force help individuals compare their competitive forces by analyzing how easy it is for the market to gain new entrants.

Barriers like complex distribution networks, high starting capital costs, and difficulties in finding suppliers who are not already committed to competitors in an industry are strong elements that reduce the threat of new entrants.

There is the threat of new entrants when

1. There are little to no barriers to entry
2. When the economics of scale is low
3. When there is little brand loyalty
4. When capital requirements are low
5. When switching costs are low
6. When there is little cumulative experience

Threat of Substitutes

Substitute goods or services that can be used in place of a company’s products or services pose a major threat. These substitutes affect the company’s profits and indicate that there is a highly competitive market in that industry.

There is threat of substitute products when;

1. The number of substitute products and services is high
2. Switching costs are low
3. Limited low perceived level of differentiation of product and services
4. Buyer propensity to substitute by the buyer is high

Vertical Forces

Customers Bargaining power

Buyer power is determined by how easy it is for buyers to switch to a rival. Meaning, that if buyers can easily switch to new entrants or competitors, prices will ultimately go down.

This force helps companies determine the power of their buyers and come up with strategies to maintain them and avoid losses or decreases in profits.

There is high bargaining power of buyers when;

1. Buyers are price sensitive
2. Buyers have a high capacity to substitute
3. Switching costs are low
4. The number of customers is low

Supplier’s bargaining power

A supplier’s power is when your products can only be supplied by one specific supplier hence their ability to charge you more for that service. This impacts your profitability. But the easier you can switch suppliers, the easier it is to find cheaper alternatives to supply your products or services.

Supplier power is high when;

1. The number of size of suppliers is low
2. The business has limited capacity to substitute
3. Products from suppliers are not unique.

How to Apply Porter’s 5 competitive forces?

Companies need to gather data and information, analyze results and formulate a strategy depending on the conclusions. Using these conclusions, they can apply the model to make a decision.

The forces are very important because represent tools for business analysis. They are useful especially when a new business is starting out. It is also useful when a business is entering a foreign market. It helps develop an understanding of the profitability of the industry in the current times as well as in the future.

Importance of the Porter’s 5 Competitive Forces

1. They help businesses understand the intensity of competition in the industry.
2. They provide them with the opportunity to analyze the potential for long-term profit making.
3. They help establish the potential areas in that businesses can generate profit.
4. They show how high levels of competition in the industry lead to lower profits for the industry in general.
5. The forces also highlight constraints in the industry. with this information, businesses can explore periods when the constraints are relaxed for them to take advantage of.

Conclusion

Porter’s 5 competitive forces is critical for the development of strategy for the business. it provides businesses with the platform to be unique, to be innovative, to be proactive and to develop a better understanding of the industry.

Competition is one of the factors that businesses need to look out. Management of competition can be done adequately through the development of good business strategies.

Porter’s 5 competitive forces represents a place to start out for business where they can establish their strategy through knowledge and understanding of the industry.

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