Michael Porter of the world renowned Harvard Business School developed Porter’s Five Forces, which became a powerful business tool in terms of analysing a company and assessing just how profitable it could potentially be.

The five forces are as follows:

The Threat Of Other Products Or Services

In any market, competition will obviously be fierce where there are a number of alternative or other products or services that customers can choose.

So if a customer is choosing a chocolate bar, then they obviously have a great deal of choice and the competition will be fierce.

If however, on the other hand, the customer is choosing a bespoke custom made item of pottery that he or she wants from a specific designer and pottery company, then there will be virtually no competition.

One key aspect to analysing whether true alternatives do exist, is the level of difference between products, so like has to be compared with like.

The Risk Of New Competitors

When a market becomes successful it is immediately seen as being lucrative and so more and more competitors will join this market and will try to increase competition and probably drive profit down achieving a state where competition is such that Porter describes it as ‘perfect’ competition.

The Strength And Intensity of Competitors’ Rivalry

This is an interesting area, because it looks at the behaviour of companies and how they may react. For example, how will a company react when a competitor acts in a certain way? How will this influence what happens within the marketplace? What will happen if technological advantages of a competitor are especially advanced?

The Bargaining Power Of Buyers

The buyer or the customer is a very important link in this chain. Porter has identified them as being important in terms of being able to subject a company to pressure and ultimately being able to influence the price that a company can charge for its products.

This is interesting simply because it recognises the buyer or the customer not as a passive force within this whole process, but as a force that can actually influence how a company will operate.

The Power That Suppliers Have To Bargain

Suppliers are also afforded a position of power within these forces. The supplier need not be a supplier of parts or raw materials, but may be a supplier of labour, services, expertise or even a source of advice and if there are few alternatives available for the company involved, then the greater the supplier’s power within that whole process, which may in turn be a threat for the company using that supplier.

Conversely where the supplier has many competitors and the company could in fact secure the specific services and/or parts from any number of companies, then the supplier will have very little power and will be in a very ‘un-powerful’ position.

Applications

Porter’s five forces can be used as a tool for analysing the health status of a business, particularly with regard to the competition it faces. The fact that the five forces include some threats to the business and analyses these in depth, the five forces can be a real force for good within any analysis.

Any effective analysis of a business has to look at the threats as well as the opportunities: the picture presented has to be a real picture that is to some extent ‘warts and all’. If there is no analysis of the negative aspects or no inclusion of the competition, the business is only being looked at in isolation, which does not present a true picture of where it is within the market place as a whole.

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