Positioning StrategyHow to Analyze the Competition with Porter’s Five Forces – An Ultimate Guide

Primary Benefits of Porter’s Five Forces

• Understand the industry structure in which your company operates
• Determine a more profitable and competitive positioning for your company

Explanation of Porter’s Five Forces

Analyzes industry over 5 forces:

1. The threat of new entrants.
2. Bargaining power of suppliers.
3. Bargaining power of buyers.
4. The threat of substitute products or services.
5. Rivalry among existing competitors.

The more competitive the industry, the more pressure on the profitability of it over the mid- and long-term. Therefore, a company has to analyze all 5 five forces thoroughly and determine a positioning that will optimize its profitability.

A Step by Step Guide to How to Apply Porter’s Five Forces

“In essence, the job of the strategist is to understand and cope with competition,” states Porter. Adding, “Often, however, managers define competition too narrowly, as if it occurred only among today’s direct competitors.” Therefore, by “competition”, we understand all the 5 forces which have the potential to decrease our company’s profitability.

Analyze 5 forces as stated below:

1. The Threat of New Entrants

The force that affects profitability is the threat of new entrants rather than whether they are entering the market. And the factor that defines probability is the strength of entry barriers.

To assess the strength of entry barriers, the below analysis should be conducted:

• • • Amounts of purchases of current players from suppliers -> cost advantage of current players.

• • • Amounts of purchases of buyers from current players -> pressure on a newcomer to decrease prices to acquire a customer.

• • • The fixed costs for buyers while changing their current suppliers.

• • • Capital requirements

• • • Importance of strategic advantages that current players have, such as brand equity, access to resources, location, cumulative customer experience, etc.

• • • Ease of access to distribution channels

• • • Government policies limiting entry to the industry

2. Bargaining power of suppliers

Powerful suppliers try to capture a bigger portion from the pie by increasing prices or decreasing product/service quality.

To assess the power of suppliers, the below analysis should be conducted:

• • • Is market share split of suppliers more concentrated than the industry they serve?

• • • What percentage of suppliers’ revenue/profit is generated by the industry?

• • • What is the cost of switching suppliers?

• • • Are there alternatives/substitutes for products/services of suppliers?

• • • How differentiated are services/products of suppliers?

• • • What is the possibility of suppliers to enter the industry as a new player?

3. Threat of substitutes

The substitute is a product/service which has the ability to function similarly to products/services or the current industry. If the industry cannot differentiate itself from substitutes, substitute sets the price.

To determine the level of threat generated by substitutes, the below analysis should be conducted:

• • • Comparison of substitutes with current products/services in terms of price and performance (e.g., Whatsapp vs mobile operators in international calls)

• • • Possibility of customer switch from current products/services to substitutes

4. Bargaining power of buyers

Powerful customer groups may deteriorate the industry’s profitability by forcing down prices or demanding better quality or better service.

To assess the power of customer groups, below factors need to be analyzed:

• • • The concentration of buyers in terms of number and purchase amounts

• • • The intensity of differentiation among products/services

• • • Cost of changing vendors to buyers

• • • Possibility of buyers to enter the industry (backward integration)

• • • Share of industry’s products in buyers’ cost structure

• • • Financial robustness of buyers

• • • Impact of industry’s products on product/service quality of buyers

• • • Impact of industry’s products on profit levels of buyers

The last 4 bullets also determine the price sensitivity of buyers.

5. Rivalry among existing competitors

2 aspects of rivalry determine the profitability of the industry: intensity and basis.

To understand the intensity, the below analysis, needs to be done:

• • • How numerous are players? How balanced are players in terms of market share and investment level?

• • • The growth rate of the industry

• • • Cost of exiting the industry

• • • How aggressive are competitors to capture leadership or other strategic objectives?

• • • The ability of competitors to read each other’s moves

After intensity, the focus of analysis is the basis of competition. If competition takes place on the price dimension, the profit of the industry will be transferred to customers. To understand whether competitors are mainly focused on price, below topics need to be analyzed:

• • • The similarity between competitor products/services and the cost of the switch

• • • Level of marginal cost -> competitors tend to decrease prices when marginal costs are low

• • • Perishability -> creates pressure to cut prices to speed up sales

Other dimensions of the basis of competition generally increase prices by improving customer value, so to have a lesser probability to decrease profitability.

B) Analyze possible future changes in those 5 forces.

C) Define strategies and positioning to optimize profitability and minimize competitive vulnerability.

Porter’s Five Forces model was conceptualized by Michael. E. Porter in 1979 and published in Harvard Business Review.

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