Porter's five forces model marketing

Porter's Five
Forces Model
Marketing

Porter’s 5 Forces is an analytical model that helps marketers
and business managers look at the ‘BALANCE OF POWER’ in
a market between different organizations on a global level, and
to analyze the attractiveness and potential profitability of an
industry sector.
Porter's Five Forces is a model that identifies and analyzes five
competitive forces that shape every industry and helps
determine an industry's weaknesses and strengths. Five
Forces analysis is frequently used to identify an industry's
structure to determine corporate strategy. Porter's model can
be applied to any segment of the economy to understand the
level of competition within the industry and enhance a
company's long-term profitability.

Porter's Five Forces is a simple but POWERFUL
TOOL that you can use to identify the main
sources of competition in your industry or sector.
When you understand the forces affecting your
industry, you'll be able to adjust your strategy, boost
your profitability, and stay ahead of the competition.
For example, you could take fair advantage of a
strong position or improve a weak one, and avoid
taking wrong steps in the future.

Michael Porter's Five Forces model is an important
tool for understanding the main competitive forces
at work in an industry. This can help you to assess
the attractiveness of an industry, and pinpoint areas
where you can adjust your strategy to improve
profitability.
Why is Porter's five forces important?

Porter's Five Forces can help a business:--
 Learn what industry they need to target.
 Determine which industries give the best or least
chances of success.
 Understand the demand for their product.
 Recognize their risks.
 Recognize their opportunities.
 Learn how profits get distributed within an
industry.
 Analyze industry trends.
 Predict future trends.

1. Competition in the Industry
The first of the five forces refers to the number of
competitors and their ability to undercut a
company. The larger the number of competitors,
along with the number of equivalent products and
services they offer, the lesser the power of a
company. Suppliers and buyers seek out a
company's competition if they are able to offer a
better deal or lower prices. Conversely, when
competitive rivalry is low, a company has greater
power to charge higher prices and set the terms of
deals to achieve higher sales and profits.

Find companies that sell that product or
offer that service

Determine their competitive advantages

Investigate your competitors’ sales process

 Provide high quality products. A food truck can compete
consistently by offering a higher quality menu that meets its
customers’ needs. This is especially true if your competition
is offering products that are not scratch made.
 Maintain superior service and convenience. Good customer
service is expected, but going above and beyond what your
customers have come to expect builds great customer
loyalty. Strive to cater to your customer needs and they’ll
deeply appreciate the efforts you’ve made and will likely
spread the word to others.

 Deliver your orders quickly. As hungry consumers are
continually pressed for time, speed is often a big reason they
choose a food truck to order a meal. Keeping your turn
around from order to delivery under 4 minutes while
maintaining quality and consistency can be a powerful
differentiation between you and your competitors.
 Create a unique brand personality. New food trucks need
to create a new, authentic brand that’s relevant to their
market. Most food truck startups don’t have big marketing
budgets. You need to use creativity to develop a fun brand
personality that resonates with the consumers in your area.
Say things our competitors won’t, connect directly with your
fans on social media, and engage our customers in a fun way.

Competition in an industry is low if few companies are offering
the same products. They have more opportunities to grow and
be profitable. Things that can affect competitive rivalry
include:-
 Number of competitors
 Variety of competitors
 Differences in products
 Differences in quality
 Industry balance
 Industry growth
 Customer loyalty to existing brands
 Barriers (high costs) to exit the industry

The intensity of competitor rivalry increases with:-
 A larger number of firms
 Slow market growth
 High fixed costs
 High storage costs
 Low switching costs
 Low levels of product differentiation
 High exit barriers
Common strategies for protecting market share include:
 Altering pricing policies
 Improving product differentiation
 Seeking ways to use channel distribution more creatively
 Exploiting relationships with suppliers
 Improving service levels

2. Threats of new entrants
A company's power is also affected by the force of
new entrants into its market. The less time and money
it costs for a competitor to enter a company's market
and be an effective competitor, the more an
established company's position could be significantly
weakened. An industry with strong barriers to entry is
ideal for existing companies within that industry since
the company would be able to charge higher prices
and negotiate better terms.

Things that can make it more difficult for competitors to
become established include:
 Government regulations
 Customer loyalty to existing brands
 High costs of entry
 Limited access to distribution
 Technologies needed
 Experience needed
 Economies of scale

3. Bargaining power of Buyer
The Bargaining Power of Buyers, one of the
forces in Porter's Five Forces Industry Analysis
framework, refers to the pressure that
customers/consumers can put on businesses
to get them to provide higher quality products,
better customer service, and/or lower prices

The two major components of buyer power include:
Price sensitivity: This refers to how sensitive buyers are to alterations in
price. Consumers who are more sensitive may switch to different suppliers
when a price is too high for their needs. To retain these types of customers,
organizations typically reduce prices.
Bargaining leverage: Bargaining leverage refers to the number of buyers in
an industry and how frequently they purchase a product or service.
Commercial consumers like B2B buyers often have more bargaining leverage
than retail consumers. This is because the B2B buyer population is generally
low compared to the number of suppliers. In addition, B2B buyers often
make purchases in bulk on a regular basis, which helps decrease prices per
unit of product.

Characteristics of strong buyer power
The following conditions boost the power of buyers:-
 When there are more suppliers than buyers
 When switching costs are minimal
 When the buyer can merge or purchase a supplier through backward
integration
 When the buyer can acquire goods in bulk, such as through a wholesaler
 When the buyer can find substitute products and services from
competitors
 When the buyer is the supplier's main customer
 When the buyer purchases all of the supplier's goods
 When a supplier's product doesn't differ significantly from a
competitor's product

Characteristics of weak buyer power
 The conditions below often lower or weaken buyer power:
 When buyers outnumber suppliers
 When switching costs are high
 When backward integration is not feasible due to cost or other limiting
factors
 When bulk purchasing isn't available
 When a competitor's products don't fit the buyer's needs
 When substitute products aren't cost-effective or aren't available on the
market
 When a supplier's product is markedly different from a competitor's
product

The benefits of analyzing buyer power
Assessing buyer power can also offer companies the chance to:
 Investigate financial opportunities and risks in their field
 Boost profit potential by assessing the maximum price
consumers may pay in an industry
 Create long-term strategies
 Make informed financial decisions
 Ensure target profit margins match market realities
 Adjust materials and the production process to ensure
goods meet the quality standards of target customers

4. Bargaining power of Suppliers
The Bargaining Power of Suppliers, one of the
forces in Porter's Five Forces Industry Analysis
Framework, is the mirror image of the
bargaining power of buyers and refers to the
pressure that suppliers can put on companies
by raising their prices, lowering their quality,
or reducing the availability of their products.

Bargaining Power of Suppliers – How Can It
Be Reduced?
 Backward integration:- This is one of the techniques
widely employed today to reduce the bargaining power of
suppliers. ...
 Multiple suppliers: When a business has only one
supplier, that supplier tends to enjoy a lot of power.
 Increase profile: This is on the other side of the coin when
compared to the previous point. If your industry doesn’t
have multiple suppliers, try to become the dominant player
in the market and increase your business profile. Bulk
procurement also helps in this regard. No supplier would
want to antagonize his biggest buyers.

 Substitutes: Substitutes are those which essentially
perform the same function and satisfy the same need as
the product. If your business has the availability of
substitutes, you can use them in place of regular raw
materials.
 Market education: Sometimes, when suppliers enjoy a
bargaining power, it is not always because the supplier
did something right. It could also be that the buyer did
something wrong. Procurement professionals have to
make themselves familiar with the market or its changes
and recent trends in order to avoid being taken for a ride
by their suppliers.

5. Threat of substitute products
The last of the five forces focuses on substitutes. Substitute
goods or services that can be used in place of a company's
products or services pose a threat. Companies that produce
goods or services for which there are no close substitutes will
have more power to increase prices and lock in favorable
terms. When close substitutes are available, customers will
have the option to forgo buying a company's product, and a
company's power can be weakened.
Understanding Porter's Five Forces and how they apply to an
industry, can enable a company to adjust its business strategy
to better use its resources to generate higher earnings for its
investors.

Things that can affect substitute products' potential threats
to a company include:
 The number of substitute products
 The quality of substitute products
 The price of substitute products
 The customer's likelihood to switch between products
 Customers' perceived difference between products
 The competition's aggressiveness
 The competition's profits

Porter's five forces model marketing

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