Porter’s Five Forces

Authored by CIAG Interns: Hayden King and Charlie Susser

Hayden & Charlie_ Porter's Five Forces.pdf

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Cambridge International Advisory Group

Small Businesses

Porter’s Five Forces

Introduction[1]

Porter's Five Forces is a framework that businesses use to analyze their competitive environment and make strategic decisions. Developed by Michael E. Porter, a professor at Harvard Business School, the model helps organizations understand the dynamics that shape their industry.[2] Analyzing your industry with this framework is the first step in crafting a strategy that will enhance your competitive position and ensure long-term success. In this article, we explain each of the five forces and provide guidance on how you can apply this model to gain a competitive edge.

The Threat of Entrants[3]

New entrants can disrupt your market by bringing new ideas, technologies, or cost structures. The threat of new entrants depends on the barriers to entry in your industry. High barriers, such as high fixed costs or strict regulations, protect existing businesses from new competition.

Strategies to Mitigate The Threat of Entrants:

●  Build brand loyalty through exceptional service, quality products, and loyalty programs.

●  Invest in capital projects that reduce average costs, making it harder for newcomers to compete on price.

●   Invest in developing or acquiring technology to stay ahead of potential competitors.

The Threat of Substitution[4]

Substitutes are products or services that meet the same need as your offerings but through different means. The threat of substitution is higher when competitors offer better performance, lower cost, or greater convenience.

Strategies to The Threat of Substitution:

● Continuously improve your products and services to stay ahead of substitutes.

● Provide exceptional customer service to create strong brand loyalty and a reputation of high quality.

● Highlight the advantages of your offerings compared to substitutes in your marketing materials.

Customer Bargaining Power

Customers with market power can demand lower prices, higher quality, or additional services. Buyers have more significant market power when your product has many viable alternatives.

Strategies to Mitigate Customer Bargaining Power:

● Offer unique features or superior quality to reduce price sensitivity.

● Make it costly or inconvenient for buyers to switch to competitors by offering loyalty programs or bundled services.

● Serve niche markets where buyers have fewer alternatives and are less price sensitive.

Supplier Bargaining Power[5]

Some suppliers may have market power which can be exerted by raising prices or limiting quality. This power is higher if there are few suppliers or if they offer unique products. If suppliers can charge whatever your business is able to pay, they can prevent you from ever growing your margins.

Strategies to Mitigate Supplier Bargaining Power:

● Avoid dependency on a single upstream firm by sourcing from multiple suppliers.

● Build strong relationships with your suppliers to negotiate better terms and ensure reliable supply.

● Consider acquiring or merging with key suppliers to control more of your supply chain. This is called vertical integration.

Competitive Rivalry[6]

Intense rivalry between competing firms can erode the profitability of an industry through price wars or advertising battles. The effects of fierce competition on profitability depend on the pricing structure of the industry. In industries where firms are price-setters, profits can approach zero. The intensity of inter-firm competition is dependent on the number of firms, the market structure, and product differentiation.

Strategies to Mitigate Competitive Rivalry:

● Stand out from competitors by offering unique features, superior quality, or exceptional service.

● Investing in innovation and research to introduce new products that can minimize the effect that competitors can have on the same market.

● Focus on building strong, long-term relationships with your customers to enhance loyalty and reduce the impact of competitor actions.

How CIAG Can Help

CIAG can significantly support small businesses by applying the Porter's Five Forces framework to their strategic development and market positioning. CIAG can assist clients through conducting a thorough and comprehensive analysis of the dynamics of any given industry—including the threat of new entrants, the bargaining power of suppliers and buyers, the threat of substitutes, and the effects of competitive rivalry—CIAG can help businesses identify critical opportunities for growth while also analyzing potential threats in the market.

Conclusion

To conclude, Porter’s Five Forces are essential for businesses in finding an adequate role within a market. Utilizing this structured approach can not only enhance adaptability to changing market conditions but can also aid small businesses in achieving sustainable growth in their respective market. With support from CIAG’s experts, businesses can adequately capitalize on their strengths, recognize their weaknesses, analyze their competition and thrive in a competitive and complex market landscape.

References:

[1] Peter Gratton, “Porter’s 5 Forces Explained and How to Use the Model,” Investopedia (Investopedia, June 18, 2024), https://www.investopedia.com/terms/p/porter.asp

[2] Jane Dodge, “SJSU Research Guides: BUS5 181: Introduction to Entrepreneurship: Porter’s Five Forces,” libguides.sjsu.edu, n.d., https://libguides.sjsu.edu/c.php?g=230204&p=8931615.

[3] Monique Danao, “Porter’s Five Forces: Definition & How to Use the Model,” www.forbes.com (Forbes Media LLC, February 12, 2024), https://www.forbes.com/advisor/business/porters-five-forces/.

[4] Monique Danao, “Porter’s Five Forces: Definition & How to Use the Model,” www.forbes.com (Forbes Media LLC, February 12, 2024), https://www.forbes.com/advisor/business/porters-five-forces/.

[5] Peter Gratton, “Porter’s 5 Forces Explained and How to Use the Model,” Investopedia (Investopedia, June 18, 2024), https://www.investopedia.com/terms/p/porter.asp.

[6] Peter Gratton, “Porter’s 5 Forces Explained and How to Use the Model,” Investopedia (Investopedia, June 18, 2024), https://www.investopedia.com/terms/p/porter.asp.