Michael Porter’s Five Forces Model is a simple yet effective business analysis tool that is used to determine whether a strategy has the potential to be profitable in a company’s competitive environment. When carried out in the right way, with the right tools, the Five Forces Analysis can provide invaluable insight into your business’s competition and how much power you hold in the market, so you can adjust your strategy for success.
Despite being developed by Harvard University Professor, Michael E Porter in 1979, Porter’s Five Forces Framework (also referred to as Porter’s Five Forces Analysis or the Five Forces Model) remains a popular analysis tool that is still widely used today when defining business strategies. The model was originally developed as a way for businesses to evaluate their competition and determine the attractiveness of an industry sector and its potential for profit.
Today, the framework is typically used by business strategists and marketing teams to assess how current trends will affect an industry (for example, by increasing demand for a particular product or service), which can help them to assess whether a particular market is worth moving into.
As its name suggests, Porter identified five forces that make up a competitive environment and can affect your business’s future profitability:
Competition in the industry: When examining your market, the first action you need to take is to establish who your competition actually is. You need to look at how many rivals you currently have to compete with and determine how their product and service offering stacks up compared to yours – whether this is positively or negatively.
Potential of new entrants into the industry: When fresh competition enters your market, this can have the ability to change your position and have an effect on your profits (for example, by lowering the price of your products or services as there is a lower demand for them). This stage of the analysis will require you to consider factors that can make your market easy to penetrate, such as the costs of entering your market and how well it is regulated.
Bargaining power of suppliers: Suppliers to an in-demand industry (with minimal competition themselves) are able to charge more for their supplies, which affects a business’s profitability. During this stage of the analysis, don’t forget to research how many suppliers are available for you to choose from, as well as how expensive it would be for you to switch to another supplier if needed.
Bargaining power of customers: This refers to whether your customers have the potential to drive the prices of your products or services down, often in regards to whether they can find more competitive prices, higher quality, or increased choice elsewhere. During this stage of the analysis, you need to consider how many buyers there are in your market and what it would cost them to switch to another supplier.
Threat of substitute products of services: Technology is ever-evolving, which means that products and services can easily become outdated – and substitutions can pop-up quickly in the market. A great example is Netflix, who sent videos directly to people’s homes, rather than requiring them to visit physical stores (like their competitors). With this in mind, ask yourself whether your customers are likely to find a suitable alternative to your product or service and if you are offering a high enough quality service to deter them from jumping ship.
We all know the importance of conducting thorough competitor research. In fact, this is a vital part of any successful marketing strategy. Keeping up to date with what your competitors are doing will help you determine what their strengths and weaknesses are, giving you a better idea of what you should avoid, and what you should be using as inspiration. Knowing exactly what is happening in your industry (such as any current trends) will also allow your business to be more dynamic by evolving to fit the demands of the consumer.
Michael Porter’s Five Forces Analysis goes one step further, requiring you to look at specific aspects of the market in great detail, so you can make more strategic business decisions. By understanding an industry’s opportunity for profit and any potential threats to your success, you can more easily identify your company’s strengths and take advantage of them, or determine your weaknesses and how you can improve on them.
As an example, making the decision to move into a market that’s already saturated due to high demand means there’s more competition to compete with. Therefore, you’ll have to invest more money into marketing, sales and product development to stand out and may have to reduce your prices. Similarly, you may think moving into a market with less competition could be the answer. Using Porter’s Five Forces Model, however, you can assess whether the demand is there.
Mind mapping is a tool that’s typically associated with brainstorming and memorization, but it’s also highly effective for structuring information – making it the perfect method to use when conducting a Five Forces Analysis. Due to the interconnecting branches of a mind map (which ideally contain singular words or short phrases), you can organize important information more effectively and make it easier to digest, so you can quickly find what you need at a glance.
The reason that mind maps are such a great creative thinking tool is because of their structure; their interconnecting branches mirror our brain’s natural thinking process, helping us to trigger more associations between ideas – and in the case of the Five Forces Model, more points for analysis. Effective mind maps are also colorful and engaging, which can also boost our ability to think ‘outside the box’ and explore avenues you may have never considered before.
Ready to take your business strategy to the next level with the Five Forces Analysis? Our collaborative whiteboard software combines mind mapping with task management capabilities so you can structure your ideas, share them with your team, then turn these into actionable tasks you can see through to completion. Try it for free today.
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