Utilizing Michael Porter’s Strategic Model to Analyze Competitiveness 

You can use Porter’s Five Forces, a straightforward but effective approach, to determine the primary sources of rivalry in your business or area. 

Understanding the dynamics influencing your industry can allow you to modify your strategy, increase profitability, and beat out the competitors. For instance, you could enhance a poor position or fairly exploit a strong one in order to prevent future mistakes. 

We examine each of Porter’s Five Forces in this article and video and demonstrate how to use them to assess the strengths and weaknesses of your firm and to pinpoint important variables that could have an impact on your profitability. 

The Porter’s Five Forces Model: Who is the Creator? 

Michael Porter, a professor at Harvard Business School, developed the method to assess the allure and prospective profitability of a sector. It has grown to be one of the most well-known and respected company strategy tools since its release in 1979. 

In his Harvard Business Review essay, “How Competitive Forces Shape Strategy,” Porter acknowledged that firms enjoy keeping a close eye on their rivals, but he urged them to look beyond their rivals’ behavior and consider the forces at play in their larger business environment. [1] 

What Are the Five Forces of Porter? 

Porter claims that there are five forces that are the main sources of competition within a given business. As follows: 

1. Competitive competition.

2. Supplier Influence. 

3. Buyer Influence 

4. Substitution Threat.

5. Potential for New Entry 

The Five Competitive Forces That Shape Strategy, a later piece he wrote, including a description of them. [2] 

He emphasized the need to distinguish these five forces from more transient elements like industrial growth rates, governmental actions, and technology advancements. Porter claims that the latter are examples of ephemeral influences, but the Five Forces are enduring elements of the structure of an industry. 

Let’s look more closely at Porter’s Five Forces: 

1. Competitive opposition 

The strength and number of your opponents are examined in the first of Porter’s Five Forces. How numerous are your competitors? Who are they and how do their goods and services stack up against yours in terms of quality? 

Companies draw clients in an industry with fierce competition by aggressively lowering costs and implementing high-impact marketing efforts. However, if customers believe they’re not getting a good deal from you, this may make it simple for suppliers and purchasers to move elsewhere. 

On the other side, if there is little competition and no one else is doing what you do, you will probably have a strong competitive advantage as well as a profitable business. 

Keep in mind that Michael Porter’s Four Corners Model was entirely based on competitor behavior; you can read more about that in our related post. 

2. Provider Strength 

How simple it is for your suppliers to raise their rates determines how powerful they are as a provider. Which providers are you considering? How distinctive is the good or service they offer? Additionally, how expensive would it be to change suppliers? 

It will be simpler to switch to a less expensive option the more suppliers you have to pick from. On the other hand, when there are fewer suppliers and you depend more on them for assistance, the stronger their position and capacity to charge you more is. If you are compelled into pricey contracts, for instance, this may have an effect on your profitability. 

3. Buyer Influence 

In an industry, customers have “buyer power” if there are relatively few of them in comparison to the number of providers. This implies that consumers probably find it simple to switch to new, less expensive competitors, which could ultimately drive costs down. 

Consider how many customers you have. How much do they order? How much would it cost them to switch to a competitor’s goods and services instead of yours? Do your customers have the power to impose terms on you? 

Dealing with a small number of knowledgeable clients gives them more clout. But if you have many of clients and few rivals, your power grows. 

It takes considerable ability to determine how much to charge for your goods in order to protect your brand and draw in the clients you desire. Learn more about Kotler’s pricing strategies in this post! . 

4. Substitution Threat 

This refers to the chance that your clients may discover another way to carry out your services. For instance, if you offer a special software solution that automates a crucial activity, customers might opt to do it manually or by outsourcing. A simple and inexpensive replacement can erode your position and jeopardize your profits. 

5. New Entry Threat 

The ease with which consumers can access your market may have an impact on your position. Competitors can easily enter your market and erode your position if it doesn’t cost much money or effort to compete effectively in it or if your core innovations aren’t well protected. 

However, if you have robust and long-lasting barriers to entry, you may maintain an advantageous position and fairly profit from it. 

Is it relatively simple for a new rival to establish a presence in your market or industry? What would the price be, and how strictly is your industry regulated? Do newcomers enter and leave frequently? Or is a small group of major businesses in the market dominating? 

Threat of New Entry under Porter’s Five Forces 

Porter’s Five Forces Model: Use Cases 

You may study an industry’s attractiveness, evaluate investment possibilities, and gauge the level of competition in your market using Porter’s Five Forces model. 

When applying the model, start by considering how each of the five forces operates in your sector. To do this, refer to the subheadings listed beneath each force in figure 1 above. 

Use our worksheet, which is available only to subscribers, to list the factors at play in your sector and then summarize their sizes and scales on your diagram. Use a single “+” symbol to indicate a force that is slightly in your favor, or a single “-” sign to indicate a force that is slightly working against you. 

For a force that is strongly on your side, use “++,” and for one that is strongly against you, use “—.” You can use “o” to denote a neutral force. (See image 2 below for an illustration of this technique.) 

Finally, consider how you will likely be affected by your analysis. Although few situations are ideal, utilizing Porter’s Five Forces to analyze your industry will help you consider what you could modify to strengthen your position in the market and boost your profitability. 

Additionally, if you find yourself in a poor structural position, the model can assist you in considering how to transition into a stronger one. 

Example of Porter’s Five Forces 

In this section, we’ll look at a practical illustration of how Porter’s Five Forces Model may be used to guide good business decisions. 

Our worked example is based on a fake Martin, a business owner. He is considering shifting his focus to something in agriculture since he enjoys the concept of doing hands-on work in a rural setting and giving people what they genuinely need. He does a Five Forces study to assist him in determining whether to purchase a farm and launch a new business. and encounters a few surprises! (Click the image of figure 2 to open it in a new window.) 

Purchasing a Farm as an Example of Porter’s Five Forces 

Martin’s study has revealed several “red lights” that he was previously unaware of. For instance: -There is a significant risk of new entry. If someone appears to be consistently profitable, new competitors can readily enter the market and drive down profits. 

-The level of competitive rivalry is really strong. If someone boosts their pricing, they will soon face competition. Prices are heavily influenced lower by fierce competition. 

-Buyer power is considerable. Once more, this may exert significant downward pressure on prices. 

-A possibility of substitution exists. The capacity to import food and some cross-product substitution exist. 

It appears that the farming sector is a very difficult market to compete in and survive in unless Martin is able to find a solution to change this circumstance. He could need to focus on a market segment that is shielded from some of these influences or locate a related company that is in a stronger position. 

Porter’s Five Forces Model Criticism 

Porter’s Five Forces Model has endured enduring popularity, but has recently faced harsh criticism. [3] Is Porter’s Five Forces Still Relevant? by Isabelle et al. from 2020 has further information about this. However, the main defense is as stated in [3]. 

The 1980s saw the development of Michale Porter’s model, which was essentially characterized by:

-Strong competition. 

-A relative stability of the market. 

-Constant technical advancement. 

Today, however, technological advancements have completely changed how and how quickly we conduct business. In fact, many firms today operate in a “hypercompetitive” climate where they constantly need to be dynamic, persistent, and aggressive in order to stay on top, according to management scholar and consultant Richard D’aveni. [4] This may cause market volatility and an ongoing state of flux. 

Many people think that the somewhat rigid Five Forces Model is of limited use in predicting what lies ahead or where competitive advantage may be achieved in such a constantly changing economic environment. 

Additionally, some economists and strategists hold the view that it is impossible to evaluate an industry’s attractiveness without also taking into account the resources that the firm contributes to it. This would imply that the best way to evaluate it would be to combine the Five Forces method with a “inside out” or “resource-based” view of the business, where competitive advantage is obtained by utilizing resources and competencies within the organization. You might accomplish this by analyzing your company’s strengths and shortcomings using methods like the USP Analysis, Core Competencies Analysis, or VRIO Analysis. 

Major Points 

An important tool for comprehending the primary competitive forces at play in an industry is Porter’s Five Forces Model. You can use this to evaluate an industry’s attractiveness and identify strategic gaps that could increase profitability. 

Porter lists the following as the top five factors that can affect an industry’s competitiveness: 

1. Competitive Rivalry: The level of industry competition. 

2. Supplier Power: The capacity of suppliers to raise the cost of your raw materials and inputs. 

3. Buyer Power: The ability of your customers to influence price reductions. 

4. Threat of Substitution: the possibility of using alternative goods and services in place of your own. 

5. The ease with which new competitors can enter the market poses a threat to existing markets (and potentially drive down your prices). 

You can quickly evaluate your competitive position by considering how each factor influences your organization and by determining its strength and direction. 

Then you can consider the strategic adjustments you need to make to generate long-term benefit.

If you found this article insightful, you might also be interested in exploring these topics further. Here are five articles that could capture your attention:

1. Self-Coaching Strategies – Discover techniques to coach yourself towards personal and professional growth.
2. Team Management – Learn effective ways to lead and manage a team successfully.
3. Essential Competencies for Managing a Team – Understand the key skills and competencies required for effective team management.
4. Providing for Your People – Explore strategies to support and nurture your team members’ development.
5. Mentoring – Gain insights into the art of mentoring and how it can benefit both mentors and mentees.