The analysis of competitive forces is very important at all stages of the functioning of a business. In this article, I want to introduce readers to another method for analyzing competitors and the competitive environment. This method is named after its author, Michael Porter, a professor at Harvard Business School. Michael Porter is one of the world's leading experts in the field of economic competition in both domestic and international markets.
Introduction. Analysis of competitive forces according to Porter.
Porter presented his analysis of competitive forces in 1979, and at the same time this method was called Porter's Five Forces Method. During his professional activity Michael Porter systematized competition models and developed rules and methods of conducting competition On the market.
Of course, first of all, Porter's five forces method is an analysis tool for big business. But he can and should use Porter's methods for his analyzes and further actions.
“In order for a company to generate consistent, growing revenue, it needs to achieve leadership in one of three areas: product, price, or niche market,” Porter wrote. And it's hard to disagree with that. And small businesses are also inseparable from these findings.
Five Competitive Forces Model by Michael Porter.
In his Theory of Competition, Michael Porter described how to create competitive advantage and long-term profitability of products, as well as the analysis of competitive forces and the ways in which profitability can be maintained and maintained over a long period of time.
The essence of Porter's theory is shown in the figure. Porter's theory of competition states that there are five forces in the market that determine the comfort of the existence of a business in the market and its possible level.
Each force in Michael Porter's model poses a certain threat to business, has a significant impact on the level of competitiveness of both the business as a whole and individual products.
Michael Porter believes that it is the influence of suppliers, consumers, new players, the emergence of substitute products and competitors that are the main sources of competition. This formed the name of the model - " Porter's five forces model of competition.
Porter's model allows us to draw several fundamental conclusions.
1) As action increases in a market niche, that market niche becomes less profitable.
2) Accordingly, the weaker the influence of competitive forces, the more profitable and attractive the market niche.
3) Business profits are most affected by the most influential competitive forces.
Consider the impact each force has on the market and business.
Strength #1. Threat of intrusion by new players.
What dangers do new players bring to the market? First of all, new players create tightness in the market, trying to take away customers from existing players. In addition, new players are adding new production capacities to the market, new resources, perhaps higher levels, perhaps more low prices for products. All this can cause changes in the market, change consumer preferences, reduce the profits of existing players. The number of new players and their impact on a market niche depends on the level of entry barriers in this niche.
Porter identified six main factors that influence the height of market niche barriers and make it difficult for new players to enter it.
1) Level of investment to start a business . The higher the initial level for entering the market, the more difficult it is for new players to enter it, the less attractive it is for new players.
2) Variety of products on the market. The higher the variety of goods and services in a market niche, the more difficult it is for new players to enter the market.
3) The strength of existing brands in the market . The more popular and well-known brands of existing market players, the more difficult it is for a newcomer to enter it.
4) The volume of production of existing players. The larger the volume of business production, the lower the cost per unit of production, the more difficult it is for a new player to achieve high profitability when entering the market.
5) State regulation. The higher the restrictions imposed by the state on business, the greater the influence of the state on business, the lower the attractiveness of the niche for new players.
6) High fixed costs in a market niche . The higher the level of fixed costs in a market niche, in a region, the more difficult it is for new players to make a profit, the more difficult it is for them to enter the market.
7) Access to consumption channels. The harder it is to distinguish target audience in the market, the more difficult it is to reach the target consumer, the lower the attractiveness of the market niche.
There are still quite a few threats to entry into the market niche for new players. This is the willingness and ability of existing players to manipulate prices to maintain market share. This is the availability of reserve sources of financing for existing players and additional production capacity. This is the commitment of consumers to a particular brand. Well, you can not discount the general slowdown in market growth, or recessions and crises in the market.
Strength #2. Bargaining power of buyers.
The buyer ensures the existence of the market by satisfying his needs. There is no market without buyers. Therefore, the buyer is the most important participant in the market. And, therefore, has a significant impact on the market.
What dangers do consumers bring to the market? Consumers can toughen competition by making higher demands on product quality, service level, and exert constant pressure on the price level. Here are the main factors when buyers become a threat to a business and significantly affect its profit.
1) Dissatisfaction with product quality. Dissatisfaction with quality creates a need for quality products that can be satisfied by competitors or new market players.
2) Concentration of business sales to a limited circle of consumers. If buyers are concentrated in a limited number of certain groups and these groups buy on a large scale, the business is forced to constantly make concessions to such buyers in order to generate income. But his profit will decrease with these concessions.
3) Business products are not unique . Products sold on the market are not unique and do not differ from competitors' products. The buyer can freely change the seller without making a specific choice. The choice of the buyer will be random.
4) Increased sensitivity of target consumers to the price of products . The higher the sensitivity of target consumers to , the higher the likelihood of buying a product at a lower price from competitors, despite the lower quality of their products. The consumer provokes a price war that does not end well.
As you can see, the higher demands made by the consumer are forcing manufacturers to improve the quality and reduce the prices of their products. And this inevitably entails an increase in costs and, consequently, a reduction in profits.
Power #3. The emergence of substitute products.
For the consumer, substitute goods limit the rise in prices in the market. Well, for businesses, this is a very big threat. And if market players fail to differentiate their product from substitute products, there will be low profits in the market niche and even many players leaving the market. A very typical example is the mass entry of inexpensive products from China to the markets.
What types of substitute products pose the greatest threat to the market?
1) Substitute products that can provide a better price-quality ratio (see). Products with the best price-quality ratio almost always intercept large group consumers in the market.
2) Substitute products that are not of high quality, but have a clear advantage in price . Simply put, fake products of the main market players.
3) Fundamentally new substitute products. Substitute goods that allow the consumer to satisfy the same needs as the goods existing on the market, but by other, cheaper or better methods.
4) Substitute products produced by major players in other markets. Substitute products produced by large players who have high profits in other markets and are able to have a less profitable business in the existing market.
It is quite natural that the higher the share of substitute goods in the market, the lower the profit and competitiveness of businesses operating in the market.
Power #4. Bargaining power of suppliers.
Suppliers have an impact on the competitiveness of market players, since are the owners of resources for the production of products. Here are the main factors when suppliers become a threat to a business and significantly affect its profits.
1) Few vendors on the market . The fewer suppliers, the more likely an unreasonable increase in prices for supplied raw materials. The most unfavorable factor is the monopoly of raw material suppliers and its dictates of prices and conditions.
2) Limited volume of products produced by suppliers. Or the limited amount of quality products they produce. This volume does not meet the market demand for quality raw materials and allows suppliers to dictate their terms.
3) Low interest of producers of raw materials to the market segment. The market niche is not a priority for suppliers and the implementation of their resources in it does not provide high income for the supplier.
4) High costs when switching to new suppliers. The costs of switching to new suppliers are high due to the uniqueness of raw materials or due to the significant remoteness of new suppliers.
result market power suppliers is rising prices for raw materials. And if market players cannot raise their prices for finished products, profit from the sale of goods and services is reduced.
Strength #5. Competition in the market.
Competition in the market is good for the consumer. And businesses lead to lower prices for products, increase the cost of promoting goods, improve product quality, and increase investment in new developments. All this reduces the profitability of businesses.
Competition grows and becomes a threat to businesses in the presence of a number of factors.
1) Crowding in the market or in a market niche. There are a large number of players on the market and their number is constantly growing. Moreover, there are no clear market leaders. The more players in the market, the higher the level of competition and the risk of losing market share.
2) Low market growth rate or market downturn. It leads to a constant redistribution of the market, the capture of market share from each other.
3) The presence on the market of a large number of homogeneous products . Low differentiation of products in the market creates many buying options for the consumer, leads to the constant switching of the consumer from one business to another, leads to instability in the income and profits of businesses.
4) High costs of business reorientation . If the costs of reorienting businesses in a given market segment are high, players do not leave this segment, continue to exist even with low profitability, create an excess of products on the market, and increase competition.
Conclusion.
The article is quite long. But even in it I did not convey all the information on the analysis of Porter's competitive forces. Porter's analysis of competitive forces is good precisely for its practical component. But I think that acquaintance with his theory is very useful, and without this acquaintance it is impossible to proceed to practical application analysis of the five competitive forces. Therefore, I will discuss how to use his analysis of competitive forces in practice in the next article. So, who is interested in this topic, stay tuned for updates on the site.
And I want to tell about my observations. It seems that all Porter's conclusions are very simple, logical and known. But this only emphasizes the relevance of his theory - a very simple and logical analysis of competitive forces.
Michael Porter's 5 Competitive Forces is a fairly old and well-known model for determining the attractiveness of the current industry for a company. It can be used to identify potential hazards and problems that the company will have to face.
In addition, Porter's model can help you find a competitive advantage that puts your company in a better position. True, it is worth making a number of amendments - this is just a model that served as the basis for future developments.
Porter calls these forces the "microenvironment", in contrast to the large number of factors included in the term "macroenvironment". The macro environment consists of those forces that affect a company's ability to serve its own customers and make a profit. A change in any of the "microenvironment" forces usually requires a company to rethink its place in the industry and market. A sufficiently attractive industry does not mean that every company in it will earn the same profit. Companies should apply their core competencies, business models or distribution networks to make a profit greater than the industry average. good example there is a market for passenger air transportation. In an industry where profitability is quite low, there are companies that, due to unique business models, earn higher profits than the industry average. Strategy consultants sometimes use the Porter Five Forces Analysis framework when qualitatively assessing a company's strategic position in an industry. However, for most consultants, this technique is just the starting point in a list of tools or techniques they can use. Like all generalizing methods, an analysis that does not take into account exceptions and particulars is considered as simplified.
Porter's "Five Forces Analysis" includes three forces of "horizontal" competition: the threat of substitute products, the threat of new players, the level of competition; and two forces of "vertical" competition: bargaining power of suppliers and bargaining power of consumers.
According to Porter, the five forces model should only be used for the industry as a whole. The model is not intended to be used for a group of industries or any part of one industry. A company that does business in one industry must develop at least one "Porter's Five Forces Analysis" for that industry. Porter elaborates that for diversified companies, the main fundamental issue of corporate strategy is the choice of industries (lines of business) in which the company will compete; and for each line of business, there should be its own industry-specific five forces analysis. On average, companies in the Global 1000 compete in approximately 52 industries (lines of business).
Porter's five forces analysis is only part of Porter's entire strategic model. The remaining elements are "value chain" and "model strategies.
Porter's five powers include:
Porter's five forces model shown in Figure 2 is a powerful tool for diagnosing competitive market conditions and evaluating how important and effective each of them is. This is the most popular method of competition analysis and is easy to apply in practice.
Rice. 2
1. Threat of substitute products
Availability of substitute products, the propensity of consumers to which may increase due to price increases (demand elasticity).
- The propensity of consumers to buy substitute products;
- Comparison of price and quality of substitute products;
- the cost of switching to a substitute product for the consumer;
- level of perception of product differentiation.
- 2. The threat of new players
Markets that bring high profits attract new players. As a result, numerous new players appear, significantly reducing profits. If no action is taken to block or hinder the entry of new players, profits will consistently decline as the level of competition increases (see perfect competition).
- · presence of entry barriers (licenses, patents, copyrights, etc.);
- the need to spend on product differentiation;
- brand value;
- Switching cost or sunk (drowned) costs;
- start-up costs for new players;
- access to distribution
- cost advantages;
- • advantages in position on the curve of knowledge acquisition;
- • expected responses of old players;
- · reaction of the government and/or other market regulators.
- 3. Bargaining power of suppliers
Suppliers of raw materials, components, labor and services can influence a company's operations. Suppliers may refuse to work with the company or, for example, set excessive high prices to unique resources.
- comparison of the cost of switching suppliers and the cost of switching companies;
- the degree of differentiation of raw materials and starting materials;
- availability of substitute suppliers;
- comparison of the concentration of suppliers and the concentration of the company;
- · labor force solidarity (eg trade union activities);
- · The threat of forward integration by vendors may affect a company's ability to integrate backward;
- Comparison of the cost of raw materials and starting materials and the selling price of the company's product.
- 4. Bargaining power of consumers
The ability of consumers to influence the company, as well as the reaction of consumer sensitivity to price changes.
- concentration of consumers to the level of concentration of the company;
- degree of dependence on existing distribution channels;
- The number of consumers
- Comparison of the cost of switching the consumer and the cost of switching the company;
- Availability of information for consumers;
- · Possibility of vertical integration (construction of holdings with vertical integration);
- the availability of existing substitute products;
- price sensitivity of consumers;
- Distinctive advantages of the company's products (uniqueness).
- 5. Level of competition
For most industries, this is a determining factor influencing the level of competition in the industry. Sometimes players compete aggressively, sometimes there is non-price competition in innovation, marketing, etc.
- The number of competitors
- the level of market growth;
- · market saturation criteria;
- barriers to exit from the industry;
- · distinctive features competitors;
- the level of advertising costs of competitors;
- Ambitions of the first persons and shareholders of competitors
”, developed by Professor Michael Eugene Porter in 1979 at Harvard Business School. It is a technique for analyzing the attractiveness of a current or new industry for an organization. It also allows an organization to identify its main competitive advantages and, by changing the strategy, achieve a better position in the market. This type of analysis is most effectively used in marketing research and strategic planning In the organisation.
Porter's Five Forces Analysis method is designed to study external context organization and provides data for SWOT analysis in terms of opportunities (Opportunities) and threats (Threats) that an organization in the industry may face. However, the method also provides a lot of information to determine the strengths (Strengths) and weaknesses (Weaknesses) of the organization, which allow it to occupy a certain place in the industry.
This methodology is very general and can be applied to any industry and situation. For example, when analyzing the competitive advantages of not only organizations, but also regions or countries. Porter's Five Forces Analysis method is conducted separately for each industry in which an organization does business, and not for a group of industries or just a part of an industry.
What is the essence of the method
The method is based on the analysis and evaluation of the five forces (five parameters) identified by Porter:
1. The threat of the emergence of substitutes for goods or services;
2. The threat of new players entering the market;
3. Bargaining power of buyers;
4. Bargaining power of suppliers;
5. The level of competition or intra-industry competition.
These forces determine the level of competition and, accordingly, the attractiveness of the industry. The attractiveness of an industry, as a rule, means its profitability.
How to apply the method
Each strength highlighted by Michael Porter represents a separate level of competitiveness of a product or service. In the course of the analysis, each force is examined in turn and its magnitude is determined - the degree of influence of the force on the attractiveness of the industry and on the position of the organization in the industry.
To determine the magnitude of each Porter force, its components are evaluated. Forces can be calculated in various ways, for example by scoring each of the components (see table 1 below).
Based on the assessment data, conclusions are drawn about the attractiveness of the industry and the position of the organization in the industry and appropriate decisions are made.
1. The threat of the emergence of substitutes for goods and services
Technological progress does not stand still, and new goods and services come to the market, replacing some that were used before. Organizations can have serious problems if they do not keep up with the emergence of new products and services that replace those that they provide.
For example,
Artificial materials can be a substitute product for natural wood in furniture production. Replace Services travel agencies can oonline booking of airline tickets, hotels and other services through the websites of airlines and other intermediaries.
The likelihood of substitutes for goods and services being threatened depends on the cost of substitutes and the willingness of consumers to accept such replacements. This circumstance must be taken into account in the pricing policy of the organization.
2. The threat of new players entering the market
The more profitable the market, the more attractive it is for new players. The emergence of a large number of new players reduces profits. If organizations do not take action to block or hinder the entry of new players into the market, profits will gradually decline as the level of competition increases.
In addition, new players often bring new technologies, production capacities, and resources to the market, which can also influence the industry, consumer behavior, and set work criteria for existing players.
Thus, when assessing this strength, it is necessary to evaluate the difficulty of entering the market for new players.
For example,
To start Building bussiness, it is necessary to have a significant start-up capital, obtain licenses and other permits, attract the necessary specialists and experts, etc. All this creates difficulties (barriers) to enter the market. Organizing an online business for the resale of tangible goods through an online store is not difficult, fast, and possible with symbolic money. Hence - a low entry threshold for new players, and, as a rule, not a high profit.
When working with new players, organizations are advised to properly build entry barriers. If the barriers to entry into an industry are high and/or the level of opposition from existing players is high, then the impact of new players on industry profits will be less noticeable.
3. Bargaining power of suppliers
Suppliers can influence an industry by raising prices, refusing to work with a customer, or reducing the quality of their products or services.
The bargaining power of suppliers is stronger if the goods or services supplied by the suppliers are critical to production process and / or significantly affect the quality of an industry product or service. This power also increases when suppliers are in a position to choose the customers they work with and influence the organization in some way.
For example,
Producers of some species chemical products in the CIS countries (caustic soda, chlorine, synthetic of hydrochloric acid etc.) , used in industry in large volumes, for many years did not have enough competitors in this geographical area and therefore could boldly dictate their terms. They set different prices for their products for different distributors, determined the schedule and volumes of shipment of products at their own discretion, worked only with selected distributors, often chosen on the basis of personal relationships. Naturally, distributors who have worked with manufacturers for more favorable conditions were making big profits.
Organizations may try to reduce the power of suppliers through new sources of supply, the threat of integration into the supply chain, and the development of standardized components of goods and services so that many suppliers can provide them.
4. Bargaining power of consumers
Consumers can influence the competitiveness of an organization's product or service in the market, as they are their consumers and ensure the existence of this market.
The bargaining power of consumers is manifested in the ability of consumers to influence the organization, as well as in the reaction of consumers' sensitivity to price changes. In evaluating this strength, Porter needs to focus on two things: do consumers have a choice, and how much choice does it have, and will consumers refuse a product or service if the price is too high?
For example,
Industrial enterprises operating in the oil and gas industry of Kazakhstan are the most solvent, making purchases constantly and in large volumes. In such conditions, their suppliers are forced to constantly make concessions to them for the right to be and remain a supplier of these enterprises and, therefore, to be guaranteed to receive income and profit. Naturally, consumers take advantage of this by setting higher requirements for the quality of goods, the level of service, putting pressure on the price level. Higher requirements for goods or services force suppliers to improve their quality, increasing their costs, and, accordingly, reducing their level of profit.
5. Level of competition
Of Porter's five forces, competition between organizations that provide similar products and services has the greatest impact. The more competitors in the market and the closer the balance of their forces to each other, the more difficult the competition.
Rivalry among competitors is reduced to the desire of various methods to improve their position in the market and win over consumers. As a rule, competitors seek to give some features to their products and services in accordance with consumer preferences and / or exploit each other's weaknesses.
For example,
large stores household appliances often provide consumers with the same type or identical products. To win over consumers and strengthen their position in the market, they use all suitable methods to fight competitors - lower prices, various promotions with discounts, long warranty periods, more high level services, including free shipping and sale of goods on credit, various ways of promoting goods, etc.
A high level of competition leads to price competition, an increase in the cost of promoting goods and services and improving their quality, an increase in investment in new developments, thereby reducing the profitability of the industry. Regardless of the level of competition, it is important for every organization to develop a strategy that will provide an advantage over competitors and protect its competitive position.
Thus, we have considered all five factors identified by Porter. It should be noted that Porter's Five Forces Analysis is a concept, not a dogma. Due to its generality, it does not take into account exceptions and particulars, and therefore is considered by analysts as a simplified method. Most often, it is the starting point in a set of tools, techniques that are used to analyze the business environment of an organization.
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Analysis of the level of competition in the industry according to the "5 forces of competition" model by Michael Porterwas carried out by analyzing five external forces:
. bargaining power of suppliers;
. market power of buyers:
. the power of existing competitors;
. the threat of new competitors;
. the threat of substitute products.
An analysis of the constituent elements (determinants) of these forces makes it possible to identify the "bottlenecks" of the project in order to make the most effective efforts to strengthen its stability and weaken the positions of competitors. The analysis was carried out in two stages:
1. Assignment of quantitative indicators to the determinants of the five forces by the method of peer review.
2. Analysis of strengths and weaknesses the current competitive situation, as well as possible compensatory measures.
Based on the results of the first stage, the following expert estimates of the values of the determinants were obtained (0 - the worst value, 6 - the best value) (see Table 1. For each force, the arithmetic mean of its determinants was calculated and the overall index of market power was derived as the arithmetic mean of all forces ( 0-1 - very low; 1.1-2.5 - low; 2.6-3.5 - medium; 3.6-5 - high; 5-6 - very high).
Table 1.
RESULTS OF ASSESSMENT OF FORCES AND DETERMINANTS ACCORDING TO THE “5 FORCES OF COMPETITION” MODEL BY M. PORTER
|
Name of determinants |
Rating (0 - 6) |
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2,9 |
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3,9 |
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1,7 |
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a. Industry Growth |
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b.Fixed (or storage) costs/value added |
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c.Temporary excess production capacity (periods of overproduction) |
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d.Product differences |
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e.Brand awareness |
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f.Switching costs (consumer) |
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g.Concentration and balance |
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h.Information complexity |
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2,4 |
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a.Economies of scale |
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c.Brand awareness |
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e.capital requirements |
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h.Access to the necessary resources |
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i.Proprietary low cost model |
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j.Government policy |
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k.Patents and licenses |
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1,3 |
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Thus, it turns out: the bargaining power of suppliers is 2.9, the bargaining power of buyers is 3.9, the power of existing competitors is 1.7, the threat from new competitors is 2.4, the threat from substitute products is 1.3. The overall market strength index is 2.4. This position can be interpreted as low (from 1.1 to 2.5). That is, the level of competition is low.
At the second stage, an analysis of opportunities and threats in the current competitive situation was carried out, and possible compensatory measures were also developed. This analysis is based on a comparison and critical evaluation of all five forces, their meanings and their constituent determinants. The results of the second stage - opportunities in conjunction with threats, as well as compensatory measures are shown in Table 2.
Table 2.
OPPORTUNITIES, THREATS AND COMPENSATORY ACTIONS ACCORDING TO M. PORTER'S 5 FORCE MODEL
|
Opportunities |
Threats |
Compensatory measures |
|
High supplier concentration Importance of orders for suppliers |
Low differentiation of raw materials Lack of substitute resources |
Conclusion of long-term contracts with suppliers of raw materials |
|
High concentration of buyers A large volume of purchases by buyers (from the company) Big Benefits for Buyers High incentives for purchase decision makers |
Availability of substitute products |
Reduce production costs and offer at a lower price compared to substitute products |
|
Industry Growth High rate of return |
Low switching costs (customers) Low product differences |
Development of new products and applications |
|
Absolute cost advantage Availability of patents and licenses |
Access of competitors to promotion channels |
Creation of own dealer and distribution network |
Thus, we get a list of possible strategic alternatives regarding the development of the market situation. The following conclusions can be drawn:
1. The market for this type of product is only developing. The number of competing firms in the industry is small. The emergence of a major world leader in the near future is not expected, and it may well be the analyzed project. The demand for this type of product is high, constant and not seasonal.
2. The product is significant to the buyer. There is a high proportion of the concentration of buyers compared to the concentration of firms, which increases competition. The range of substitute goods is quite wide, and the prices of substitute goods are usually higher. The buyer is also inclined to switch from substitute goods to basalt products, since this is both economically and technically more profitable.
3. The threat of new competitors is very low as there are high barriers to entry. These are, first of all, the available patents for technology and products, as well as the high capital intensity of creating similar industries.
4. Available big choice suppliers, both within Russia and abroad. This allows you to choose the best supply chain with the necessary ratio of price and quality.
Harvard Business School professor Michael Porter published this model in a 1979 article in the Harvard Business Review.
To run a successful business, it is necessary to take into account many factors that often escape the attention of entrepreneurs. However, if you study economics more carefully and diligently, you will learn a lot. different approaches that allow you to correctly and efficiently analyze financial activity. One of the most interesting examples is the analysis of Porter's 5 forces, an example of which will be discussed in detail in this article. But first of all, you need to figure out what it is, what it is focused on and what it will allow you to achieve. You can be sure that you will definitely need a tool like Porter's 5 Forces Analysis. Examples in the text will serve as a clear confirmation of this.
What it is?
This model was described in 1979 by the famous economist Michael Porter. He did this in order to create a complete model that would allow the company to analyze its productivity and competitiveness, and in the future also maintain these indicators at a high level. Nearly forty years later, you can see how well Porter's 5 forces analysis works.
Examples of its use in life are very diverse. Such an analysis is used by factories, restaurants, banks, and other enterprises that have competition in the market. Accordingly, if you want your business to be successful, you need to think about how to study this model. And this article will help you figure out what Porter's 5 forces analysis is. Examples of its use will also be presented to your attention. The second half of the article will be devoted to the consideration of one large example step by step.
Model description
- the bargaining power of buyers that they have in a particular segment;
- bargaining power of suppliers, which affects the supply of raw materials to enterprises;
- the threat of entry into the market by new entrants capable of increasing competition;
- the danger of the emergence of substitute products with better value for money;
- the level of competition within the selected market.
This is Porter's 5 forces. An example of analysis will be described in the second part of the article, but for now it is necessary to focus directly on the consideration of each of the forces. At first glance, it may seem that no analysis in these areas can be done, but in fact the result may surprise you. Via this approach you will be able to analyze the activities of your company and the competitiveness of its products in the market in order to make certain adjustments in the future that will allow you to increase some indicators in the long term. So, the 5 Porter Forces will be discussed in detail next, an example analysis will also be given in detail, so that as a result you will know everything you need about this method.
Using the Model
How to use in real world analysis of Porter's 5 forces? Example: Izbenka is a Russian chain of stores. The purpose of such an event is to determine the competition in a particular market segment, thanks to which it is possible to calculate how logical the introduction of a product will be, whether additional efforts will have to be made to achieve the desired result, and so on.
Therefore, this model is used in modern economy to draw up a detailed competitive analysis your company's products, as well as the selected market. Now you are sure that it is extremely necessary to apply Porter's 5 forces method. An example analysis of a bank or any other company may confirm this further, but for now it is necessary to concentrate on considering each individual force.
Threat of intrusion by new entrants
An analysis of Porter's 5 Forces using the example of a cafe can show in great detail what constitutes the first force, that is, the threat of intrusion by new participants. So, there is a certain market in which there are already operating companies with their goods and services. New entrants increase competition, which means that if new cafes enter the market, fewer customers may start visiting your establishment. How to assess the level of threat? Here Porter highlights several factors that influence the barrier to entry. If it is high, then the threat will be lower, since not everyone will want to overcome it.
What are these factors? First, economies of scale. If the volume of production in the market is large, then the cost per unit will be low, so it will be difficult for new entrants to achieve positive profitability. Secondly, the product - the more goods or services available on the market, the more difficult it will be for a new participant to compete. Thirdly, it is the need for capital - the higher the initial investment threshold, the less likely it is that new participants will enter the market. It is also worth noting the height of costs, access to and government policy regarding production for a particular market. Naturally, the factors are not limited to this - there are additional threats that depend directly on the sales market and current conditions.
Bargaining power of buyers
If we talk about the second force, then it is important to understand here that it is best to choose the market where the buyer has the least power and the weakest influence. Why? The reason is that customers are the consumers of your products and services, which is why the market exists due to them. Influential customers with a lot of power can directly influence your products by demanding more High Quality, presenting their requirements and so on. So the lower the level of influence of buyers in the market, the better for you.
There are several conditions for increasing the influence of buyers: for example, the lack of uniqueness of products (the buyer can choose any product, not just yours), high sensitivity to price (the buyer chooses not your product, but the cheapest option), and so on.
Bargaining power of suppliers
The bargaining power of suppliers does not appear as often as the power of buyers, but its influence can be very strong. The fact is that suppliers, in fact, are the owners of resources, without which the company cannot carry out its activities. And in some situations, suppliers get a much higher level of power - for example, when there are not too many of them in the market (or when there is a monopoly in the market), when the resources used to produce the goods are limited, and the costs of switching to alternative raw materials will too high. In such situations, suppliers have more power than usual, and they can directly influence the market environment, and with it, competition.
The emergence of substitute products
Substitutes are those products that can offer a profitable alternative to your product. If there are high-quality analogues, your profit will be severely limited. A serious threat comes from those substitutes that offer a more attractive quality-price ratio. As long as the consumer can buy a lower quality product at a lower price, he won't buy yours.
Substitute products also pose a threat. famous brands, which have already gained impressive popularity in other markets and now plan to achieve the same result in the new one. It is necessary to deal with substitutes by creating your own strong brand, increasing product differentiation, eliminating standardization, and so on.
Intra-industry competition
And, of course, we should not forget that the competition in the market is most influenced by the participants there. The level of competition in the market will be high if there are a large number of participants with approximately the same volume of production, low product differentiation, high barriers to entry, and so on. High competition naturally reduces the profitability of the industry, so you need to pay special attention to this point.
Assessment of the competitiveness of the product and the level of competition
Well, you already know everything about the forces that Michael Porter described in 1979, now you can safely analyze Porter's 5 forces using the example of a cafe, restaurant, store or any other institution. But to improve the efficiency of the analysis, you should standardize it. This is what will be discussed next.
An example analysis, divided into four steps, will now be described in detail. The first one is your product and the level of competition on specific market. As part of this step, you need to rate substitute products in the market by giving them a score of one to three, where one is the absence of substitute products, two is the presence in the market with a low share, and three is the presence with high market share. If you get one point, then the level of threat is low, if two - medium, and if three - high.
The next item is an analysis of intra-industry competition, one of the most important among Porter's 5 forces.
An example store analysis might look like this. There are four points in total: the number of participants in the market, the rate of market growth, the level of product differentiation, and the limitation on price increases. Naturally, each of these items also has its own criteria by which they can receive from one to three points. If we are talking about an ordinary store, then the level of market saturation will be high (3 points), as well as the growth rate of the market (1 point), the products of companies will be very different from each other (1 point), and the possibility of price increases will only be within covering costs (2 points). The result is 7 points, which gives an average level of intra-industry competition.
As for the entry of new entrants into the market, there are many more parameters: economies of scale, strong brands, product differentiation, as well as all the criteria that were described in the theoretical part. If we talk about a specific example of a store or cafe, then we can assume that only a few participants will have economies of scale (2 points), product differentiation will be medium, and the willingness of participants to reduce prices will be high, except for large representatives. The remaining parameters will be at a high level, that is, they will receive three points each.
As a result, we have a high level of threat of the emergence of new players. Now you can already see from which side there is the biggest threat to your business.
Assessing the bargaining power of buyers
However, these are only three stages, and all 5 Porter forces must be taken into account. An example of analysis in banks will allow you to understand how to analyze the power of buyers. Here the result will be expressed in high, medium or low probability of losing customers. For the average bank, about half of its income comes from high-profile clients, while the other half comes from the rest (2 points). Also, two points are obtained when assessing the propensity of customers to switch to substitutes, since the services offered by the bank are only partially unique.
In addition, customers are highly price sensitive, meaning they will always try to switch to the offer that is more profitable. Also, customer dissatisfaction can be rated at two points. And in the end it turns out that the probability of losing customers is high.
Assessing the bargaining power of suppliers
This concludes Porter's analysis of 5 competitive forces. An example will talk about the latest force regarding suppliers. Here the assessment should be given on a two-point scale, not a three-point scale. An analysis of Porter's 5 forces using the example of a restaurant shows that everything is fine with suppliers in the market - there is a wide choice of options, there is no limit in the volume of raw materials, if it is necessary to switch to another supplier, the costs will not be too high, and for the supplier himself, this industry has a high priority . As a result, it turns out that suppliers have practically no influence on the market.
Summarizing
We have studied the 5 Porter forces in detail. The enterprise analysis example ends with a summary. You need to analyze each of the five forces, determining whether it is high, medium or low for your company in a particular market, then describe in detail each of them and, if necessary, develop an area for improving the situation for you.
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