Porters Five Forces
Having been a student for a number of years studying for my MBA one of the foremost business theories mentioned was that of “Porters Five Forces”. The concept is simple but excellent. This article briefly explains who “Porter” is and concepts that he developed.
Michael E Porter
Professor Porter is probably the most well known business guru of our era. He has written numerous articles and has published in excess of 16 books. He is based out of Harvard University in the United States and even has a centre dedicated to his teachings there.
Porter is especially known for his ideas and concepts around competitive strategy and explains how competitive advantage is related to looking after your costs; linking this with your ability to participate in your market sector and maintaining profitability. His theories “Five Forces” is one that are known for their clarity and direction.
Porters Five Forces
Let us now look specifically at the “Five Forces”
Barriers of entry – If you are new on the block and you don’t particularly have a niche product that no one else can supply, getting your foot hold into a market space is going to be pretty tough. You need to build your brand identity, to have a good distribution network and you may need to meet certain regulatory requirements to meet legislation within the country in which you wish to sell your product or services. Key here for your business is to look at your cost advantage. You may be able to steal market share by offering a good value product or service at a more competitive price, whilst controlling your cost base.
The Power of Buyers – Buyers are basically your customers. Faced with a choice of which to buy they will be looking for quality and price competitiveness. It is common knowledge, especially with the advent of the Internet, that buyers have far greater access to knowledge than ever before thus the information they can collate before actually making a decision is huge in comparison to a decade ago. If your product is one that many other competitors offer then the buyer is in a stronger position to leverage a better deal in terms of purchasing power and purchasing volumes.
The Power of Suppliers – The supplier can hold some power in the Five Forces stakes. If they are operating in a niche market with fewer competitors and it’s a product or service where demand is large then they can take advantage of this situation. It is also the case that many buyers when locked into agreements and long term relationships with suppliers often may find it difficult, if not very expensive to move away from their current supplier to a new one.
The Threat of Substitutes – In business it nearly always happens where you are offering a product that is very similar to one offered by a competitor. Your customer may want a change. It could be that they simply want to try someone else; the competitor may be able to offer some differentiation in terms of price or service. In today's global economy, this threat is very common indeed.
Competitive Rivalry – Quite simply this element of Porters Five Forces encompasses all the previous forces plus more. The rivalry stakes are probably the highest of them all. In markets, there are often many players that have to look to differentiate themselves either by lower cost base thus offering more competitive prices or on brand and quality. The car industry is one where this can be seen a lot. This element often intensifies when markets are “tight”, an example of which is the current economic climate where sales are slower and the need to beat your competitor is fiercer than ever, but watch the costs as a business needs to make a profit to survive!
Michael E Porter is one of the most famous world wide business guru’s of the past century. His centre of excellence is based at Harvard University in the United States of America. Porters Five Forces encompasses five key elements, barriers of entry, threat of buyers, threat of suppliers, threat of substitutes and competitive rivalry.