What are the 5 forces of Porter: how to apply the methodology and know your market better
Do you know what are Porter’s 5 forces? Rivalry between competitors, bargaining power with suppliers, bargaining power with customers, threat of new products and services’ entry to the market, and threat of new competitors. If you want to understand more about this method and learn how to use it in your business keep reading this article.
Porter’s 5 forces provide strategic insight into competitors, being one of those key tools to develop processes that help ensure results.
Regardless of the segment in which your company develops, knowing the sector that it operates is essential to identify the gaps and position yourself in relation to them in a positive way.
After all, as I would say the phrase, we must have “one eye on the fish and another on the cat”. And that’s the way you should think about your business.
An eye on the competition to identify positive and negative points, as in a SWOT Analysis; and the other on the company to optimize strategic points. This answers part of the question: what the 5 forces of Porter are.
So now, in addition to simply hearing about it, you will know a little better about what Porter’s 5 forces are and understand how this tool actively participates in the development of companies around the world.
What are you going to read in this article?
Goal of the 5 forces of Porter
This strategic tool was created in 1979 by Michael Porter, a professor of Business and Economics at Harvard Business School.
The five forces of Porter have the objective of competitively analyzing the competition.
In this way, they help large and small companies to define:
- How to enter the market
- What position should you adopt in relation to customers and competitors
The concept of Porter’s 5 forces is not new, and for this reason this methodology is very widespread among companies around the world to analyze the business environment and where they are positioned.
While the competitiveness between companies was seen only as a rivalry, when Porter’s model emerged, it proposed a new model of thinking.
Much more than knowing the historical factors for the emergence of this tool, the important thing is to understand what Porter’s 5 forces are and how they can be applied in their context. So, let’s start!
What are Porter’s 5 forces and how do they work?
To start putting Porter’s 5 forces into practice you need an analysis to understand your business in a more comprehensive way.
As previously stated, Porter’s 5 forces are:
- Rivalry between competitors
- Bargaining power with suppliers
- Bargaining power with customers
- Threat of new products and services in the market
- Threat of new competitors
Each of these forces represents an important aspect to be analyzed in order to position your company in relation to them.
Here’s a direct, clear explanation of each of these forces so you can understand what Porter’s 5 forces are and apply them to your business.
Rivalry between competitors
While analyzing the aspect of rivalry with competitors is ideal to identify:
- Direct competitors
- Indirect Competitors
- Degree of competitiveness
But make no mistake, not always companies that sell the same product are competitors.
This factor must also consider the objectives of the consumer, after all it is the customer who dictates some market rules.
In this sense, there are some questions that can help in the process of this stage:
- What are the competitive advantages of competitors?
- Do they compete for price, location or other differentials?
- How many companies does your business compete in this market?
Bargaining power with suppliers
This factor of the 5 forces of Porter concerns the positioning of your company in relation to the management of the suppliers.
After all, the rule is clear! The greater the number of suppliers, the greater the control your company has over the final product.
Think about it, the greater the number of options for supplying the same service or product, the more your company can negotiate factors such as:
- Faster delivery
The control would be in your hands, because if the company and supplier do not enter into an agreement that is good for both, there are thousands of other options to turn to.
To find out the bargaining power of your company there are a few questions to be answered:
- How many and who are the suppliers of the sector?
- What are the competitive differentials between them?
- Who has the most bargaining power (company or supplier)?
Bargaining power with customers
This aspect is currently very much related to the sales force. In this sense your company must analyze how much it is necessary to invest to realize the sale to the consumer.
This is similar to the previous one analysis: the more options on the market offering the same solutions as your company, the less control your business has under sales.
Some questions can help you understand what the bargaining power of the business is:
- How many companies supply the same product?
- Do customers have the power to directly or indirectly influence the terms of sale? (Discounts and deadlines).
Threat of products and services
With the advancement of technology being immense, the number of new innovative and creative solutions to problems that we had never before only increases. But whoever thinks that this factor can guarantee exclusivity in sales is deceiving.
While solving a problem, there may already be something that produces the same result.
Here it is necessary to question:
- What could replace your product?
- Is there anything like your product on the market yet?
Threat of new competitors
Since the beginning of the business it is important to seal all entries. After all, much of the goal of market research and competitors is to identify and preserve the competitive differentials of your company.
The key here is to establish legal barriers to competition, such as:
- Exclusive contracts.
Like any other marketing tool, understanding what Porter’s 5 forces are, learning how to put them into practice and tuning in to your goals can be a lengthy process.
But if Porter’s 5 forces are well used, they can have positive effects on the organization’s bottom line. That way, if your company’s goal is to outperform the competition by always being strategically ahead, a great option is to invest some of your time in the reviews.
Now that you know a little better this strategic tool, how about applying these tips in your company? Do not forget to follow the results!
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