Porter's Five Forces Analysis
In his book 'Competitive Strategy: Techniques for Analysing Industries and Competitors,' Michael Porter described the five forces that affect business success. Porter states that a business will need to change these to be successful.
Supplier bargaining power
How easy is it for suppliers to drive prices up?
Like all businesses, suppliers want to make a profit and therefore want to raise their prices as high as possible. The competitive advantage of a business will therefore be affected by supplier power. If supplier power is high, e.g., because they are the only supplier in a market, then they will be able to command a higher price. This in turn will raise the costs to businesses buying from them and make them less competitive. Supplier power is therefore crucial.
Buyer bargaining power
The power that buyers have also affects competitive advantage. If the customer is powerful, he is able to push down the price he is willing to pay. For example, supermarkets in the United Kingdom are powerful and can therefore push down the prices they are willing to pay farmers for their goods.
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In your opinion, should the supermarkets do more to help farmers?
The Threat of New Entrants
How easy is it for start-ups to enter the market?
New companies entering the market creates uncertainty and puts pressure on businesses that already exist in the market. The ease with which a business can access the market or not are called ' barriers to entry'. When the barriers to entry are low it is easy to start a business in that market. For example, if you wanted to start a window cleaning business, you would only need to buy equipment in order to start trading – the barriers to entry are low. On the other hand, if entry barriers are high, it is difficult to access the market. For example, if you wanted to start an airline, the barriers to entry are much higher because of the cost of buying capital equipment such as aeroplanes.
Substitutes
How easy is it for a customer to switch to buying another product or service?
A substitute is something you can use rather than the product or service. For example, a hotel competes with other hotels, but they also compete with any other businesses that offers overnight stays such as accommodation on Airbnb, B&Bs, hostels etc. The more substitutes that are available for the product or service, the smaller your competitive advantage will be.
Competition among existing companies
How many businesses sell the same type of product/service?
The strength of competition within a market is also a key factor. If competition is strong, the prices that one business in this industry can charge are going to be lower as the requirement to compete is likely to drive prices down.