Porter’s five forces competitive analysis. The usual swot analysis is not suitable for assessing threats to business.
Porter’s five forces analysis
Since he considers the situation as a whole and does not see special cases. Therefore, in such situations, we use the method of Porter’s 5 forces.
It helps in a matter of hours to understand the level of economic competition and how to act to avoid it.
The method itself was created in 1979. But if some models have already lost ground due to old age, in the case of the Porter model everything remains at the same level.
Although I at my own risk still added 6 force, which, in my opinion, is an integral part of the analysis of competitive forces.
But let’s start from the beginning.
Michael Porter’s theory says that there are 5 forces that determine the market potential and your future strategy.
And if you do not take into account all these aspects of pressure, you can at one point miss the flash and lose in a competitive race.
So, the 5 competitive forces by Michael Porter:
- Supplier power.
- Buyer power.
- Competitive rivalry.
- Threat of substitution.
- Threat of new entry.
Analysis of competitive forces on Porter brings one main idea:
- the less pressure from all sides, the more you will earn.
- Conversely, the higher the resistance, the less money you will receive.
And this is provided that you will receive at all. Because it may happen that the business has no clearance and it is better to close it, or even not to start.
And Yes, the analysis of porter’s five forces seems external, because it is positioned as a competitive analysis. Although he actually internal, as exploring a specific company and influencing factors on it.
That is why, you can do it in a few hours, because you do not need to thoroughly dive into each competitor’s company.
I run the company on the Porter model only in the case of a new product on the market, or if you plan a long-term strategy.
After all, based on these data, I will be able to determine the most optimal position, where the client will act the minimum number of factors.
The result of the analysis is a rating of threats by priorities, as you already understand, from 5 sides. As well as created a list of ways to eliminate the dangers.
If you want to use this model of analysis to find a solution what to do here and now, it is better to put it on the shelf, and use the usual swot-analysis.
Porter considers long-term situations from different sides, it is not aimed at getting action on quick earnings. It is like image advertising, it works, but in the future.
5 FORCES IN DETAIL
Before proceeding to the process, you need to understand what each force represents.
Otherwise, you will not be able to interpret the results correctly, however, you can hardly do them either.
Therefore, as we have adopted on the blog, we study every force on the example of small businesses, not large brands.
1. Buyer pressure
It sounds strange, But your clients influence Your sphere both for the better and for the worse.
But this is assuming that we are not talking about a single insanity. Namely, when the people massively changing preferences, selection criteria, fears, needs. All I can do to change their behavior.
Such changes do not happen quickly. And this model is not needed to assess what will happen tomorrow, it looks further.
10 years ago, no one really thought about eco-products. And now everything has changed, and the struggle for every additional year of his life goes daily through the use of clean products.
We must foresee all possible cases. When the customer can go to the competitors.
Another example of this situation:
People used to go for the company’s brand. And now they more and more trust in the companies, in which the head is the head publicly. And buy less from those who hide behind the logo and corporate identity.
2. Supplier pressure
Many do not see their suppliers as a threat. And for good reason. Your supplier can one day wrap all the nuts so that you will only have to close the business.
They are due to the limited amount of raw materials will be able to release only a certain amount of products in one hand. And You will have a minimum lot because of the small turnover.
Okay, if in this situation you just have to implement in the commodity matrix another product line from another supplier.
But everything can go deeper and because of this will increase the cost, and the market will not be ready to buy Your product at this cost.
Because of this, it will quickly start to switch to solutions from other vendors with whom you do not have communication.
This situation can occur not only because of the rise in the cost of raw materials. The supplier can also decide that since it is a monopoly, you can bet your rules.
Up to the minimum purchases of several thousand dollars. Or even will the knight’s move, when it will open its network of stores and will sell directly to the end user.
Logically. Those who do not have a supplier, this item can be ignored in the analysis.
Paragraphs 3 and 4. Pressure of existing and new competitors
These two forces I unite, as they are very similar to each other. The difference is that one of them is responsible for the current competition in the market.
And the other talks about the possible risks when new players appear. Moreover, in the analysis of Porter recommend that you take into account not only direct competitors, but also all who can become them in the future.
Evaluation of existing competitors needed to understand how dangerous the situation is with the same systematic movement.
Exploring new competitors will give you an understanding of what can happen to you if they come.
On the one hand, with great competition there is a maximum development of the sphere. But on the other-you may not have time to readjust.
At one point may appear online stores, and those who did not have time to open them, flew into the pipe.
5. Pressure of new substitute products
In short, every product, and even service, has a substitute. It is a product that solves the same problem but in different ways.
We can relax in the evening by going to the cinema, restaurant, bowling alley or theatre. And it seems as it not direct competitors, but as already told, they solve problems the same.
In the model competitive forces of Porter no distinction is made on existing and new products-substitutes.
Therefore, if we talk about the mind, it is better to divide this point into two, as in the case of competition.
But if you understand that there is no fear in the existing products, you can not increase your occupation for a few more hours.
Many of you will not appreciate substitutes because of their pettiness at first glance. But I’ll just say one sentence and you’ll change your mind.:
“When rising sales of some products-substitutes, then the other sales always fall.” This is a pattern proven by dozens of practical situations.
When sales of ice cream grow, sales of soft drinks decrease.
6. The pressure of the state
Sandalo my 5 cents to this topic. Let Michael Porter does not take into account this force in his model, but I will do it. We all know that the state affects our business.
And we should consider it as a threat too. Yes, it is not necessary for all spheres, but it is better to think in advance than to run with a square head.
For example, the sphere of yoga has long been planned to be certified, to the point that the instructor will have to have a crust from a medical institution.
Do you have any idea how much this will change the market? Of course, it will take time, as it will be necessary to create an inspection body, but also to study at the medical College need not 3 months, but as much as 4 years.
POWER IN ACTION
Now, when We speak the same language, we can take and use the method of the five forces of Porter in practice.
I will show you step by step how you can evaluate your competitive strength. We will study two schemes, one of them will be simplified, the other more complete.
What you choose-decide for yourself, it all depends on the task and business.
1. Express-analysis by Porter
You take all five competitive forces, and better immediately 6 (including state), and write down their in a column. Next, you need to make also 4 columns, where you will specify an estimate for each force.
Now Your task-in empty cells, in front of each force, to put an estimate. That’s right, everything is rated.
I take the 10-point scale as a basis. But the main thing — not what division of numbers you choose, and how you understand each of these columns. To do this, I’ll describe each column in more detail.
- The assessment of the existence. You put a figure corresponding to the presence of this threat to your business.
- Assessment of negative impact. You specify indicators of how much this threat negatively affects you.
- Of the ability to parry. You write a number that shows how much you can solve this threat.
If we have a store in a shopping center, we put 4 in the “New competitors” line in the first criterion. Since new competitors are not planned for the situation in the market.
In the column about the negative impact, we put 8, as we are at the end of the corridor and new players can delay traffic if they get up earlier.
In the parry cell we put 5, as we can move closer, but it’s as lucky as the lack of empty seats now.
The final result is formed by the simplest formula
“(Assessment of the presence + Assessment of negative impact) – the possibility of parrying.” In our example analysis, it looks like this: (4+8)-5=7.
It turns out that for us this threat has a rating of 7. Bad or good — you can say only after the details that I do not have. But roughly this rather poorly, than normally.
2. Full Porter analysis
In the case of rapid methods of analysis of forces, we saw the big picture. And sometimes, for a quick analysis of the niche is enough.
Or at least to understand what is scary for us right now. And what is worth investing your mental processes in the last place.
In the case of a full analysis of competition on Porter, we need to take each force and allocate her evaluation criteria.
In a full analysis of Michael Porter’s competitive forces, the criteria are evaluated in 3 categories:
- weak (1 point),
- normal (2 points)
- strongly (3 points).
This division is based on the words of Michael Porter. Each force has its final number of points to calculate the level of competition.
At the output you should get a table where you specify the strength, its degree of threat, and a small description of what it is connected.
The last column, the most important, you describe what you are going to do to avoid falling into the pit. Without ways of parrying there is no sense in the analysis, even if you make an Express version.
Many marketers, and even more owners, such tests are frightening. It’s obvious.
Most people find it more pleasant to do more measurable things than to analyze and reduce points in tablets.
But you know perfectly well that waving a sword without understanding the essence of the problem leads to sad consequences and waste of resources.
And it is through the analysis of Porter’s 5 competitive forces that you can understand in which direction you need to put all your efforts. Yes, let him not show what will bring you money right here and now.
But you do not create a business to cut down quick money and fly to live in Miami. You do it in the future, and that will come faster than you think.