Porter’s Five Forces is a framework for analyzing the competitive forces in a market. It was developed by Michael Porter, a professor at Harvard Business School, in 1979. Porter’s Five Forces is a tool used to analyze the competitive forces in a market and determine the overall attractiveness of an industry.
The framework identifies five key forces that shape the competitive environment in a market:
Threat of new entrants: This looks at how easy or difficult it is for new companies to enter the market. Factors that can make it difficult for new companies to enter the market include high start-up costs, the need for specialized skills or technology, and the existence of strong brand loyalty among existing customers. For example, a company that sells a unique, patented product may have a low threat of new entrants because it is difficult for other companies to replicate the product. On the other hand, a company that operates in a market with low barriers to entry, such as a commodity market, may have a high threat of new entrants.
Threat of substitute products or services: This looks at the availability of alternatives to the product or service being offered. If there are many substitutes available, it can be harder for a company to charge a high price or maintain high profits. For example, a company that sells a product that has no close substitutes, such as a life-saving drug, may have a low threat of substitutes. On the other hand, a company that sells a product with many substitutes, such as coffee, may have a high threat of substitutes.
Bargaining power of customers: This looks at how much bargaining power customers have when it comes to negotiating prices and other terms with the company. Customers with a lot of bargaining power can drive down prices and demand more value for their money. Let’s say for example, a company that sells a unique, high-demand product may have low bargaining power of customers because customers are willing to pay a premium price. On the other hand, a company that sells a commodity product, such as gasoline, may have high bargaining power of customers because there are many options available and price is a major factor in the purchase decision.
Bargaining power of suppliers: This looks at how much bargaining power suppliers have when it comes to negotiating prices and other terms with the company. Suppliers with a lot of bargaining power can drive up prices and make it harder for the company to maintain profits. For example, a company that relies on a small number of suppliers for a critical input may have low bargaining power of suppliers. On the other hand, a company that has many suppliers to choose from may have high bargaining power of suppliers.
Competitive rivalry within the industry: This looks at the level of competition within the industry. If there are many companies offering similar products or services, it can be difficult for any one company to stand out and maintain high profits. For example, a company that operates in an industry with a large number of competitors may face high competitive rivalry. On the other hand, a company that operates in an industry with only a few competitors may face low competitive rivalry.
Porter’s Five Forces has been widely used by businesses, investors, and analysts to assess the competitiveness of an industry and make strategic decisions. It has also been widely taught in business schools and is considered a classic framework in the field of strategic management.
How to Use the 5 Forces Model to Understand your Industry & Find Opportunities for Growth?
To use the Five Forces model to understand your industry and find opportunities for growth, follow these steps:
- Identify the key players in your industry: Who are the main competitors in your market? Who are the suppliers and customers?
- Analyze the threat of new entrants: How easy or difficult is it for new companies to enter your market? What are the barriers to entry?
- Analyze the threat of substitute products or services: Are there many substitutes available for your product or service? How do they compare in terms of price and quality?
- Analyze the bargaining power of customers: How much bargaining power do customers have when it comes to negotiating prices and other terms with your company?
- Analyze the bargaining power of suppliers: How much bargaining power do suppliers have when it comes to negotiating prices and other terms with your company?
- Analyze the competitive rivalry within the industry: How much competition is there in your industry? How intense is the rivalry among existing competitors?
Once you have a good understanding of the forces at play in your industry, you can use this information to identify opportunities for growth. For example, if you find that there are few substitutes available for your product and customers have a high level of loyalty, you may be able to increase prices or introduce new products and services. On the other hand, if you find that there is a high threat of new entrants and intense competitive rivalry, you may need to focus on differentiating your product or service and building a strong brand to stay ahead of the competition.
Let’s take APPLE as an example:
Apple Porter’s Five Forces into Apple we can imagine how the Five Forces might have shaped Apple’s strategy. Taking the first Threat of new entrants into consideration, Apple has faced a high threat of new entrants in the smartphone and computer markets, with many companies trying to compete with its products. To counter this threat, Apple has focused on building a strong brand and developing innovative products that are difficult for competitors to replicate.
Also, for the threat of substitute products or services, Apple has faced a high threat of substitute products in the smartphone market, with many companies offering similar products at lower prices. To counter this threat, Apple has focused on building a loyal customer base and developing high-quality, differentiated products that command a premium price.
Considering bargaining power of customers, Apple has faced a high level of bargaining power from customers, who have a wide range of options when it comes to purchasing smartphones and computers. To counter this, Apple has focused on building a strong brand and creating a seamless customer experience to increase customer loyalty.
Also, talking about bargaining power of suppliers, Apple has a large and diverse supply chain, which helps to reduce its reliance on any one supplier. This gives Apple some bargaining power with its suppliers and allows it to negotiate favourable terms.
Finally, the final force competitive rivalry within the industry, Apple operates in highly competitive industries, with many companies vying for market share in the smartphone and computer markets. To stay ahead of the competition, Apple has focused on developing innovative products and building a strong brand.
So now you can see Porter’s Five Forces can played a significant role in shaping Apple’s strategy helping the company understand the competitive forces in its markets and make strategic decisions accordingly.
