In an increasingly expansive and competitive world, utilizing the rich analysis of Porter’s 5 Forces can be the difference between profit and loss. This is because, besides the thousands of well-established companies in the market, new companies emerge every day, trying to capture a share of customers and increase their profits.
Thus, conducting a thorough analysis of existing companies can bring numerous benefits, such as identifying threats and opportunities, gaining insights for continuous improvement, making better decisions, and even minimizing risks.
However, we know that analyzing the hundreds of relevant factors in such a large and diversified market can be challenging. This is where Porter’s 5 Forces come in, providing a pathway to understanding what is most important and offering a useful and versatile tool. Shall we get to know it?
What are Porter’s 5 Forces?
Developed by Michael Porter in 1979, Porter’s Five Forces is a market analysis tool, a model for analyzing competition and understanding the factors determining profitability in the context where it is applied. It consists of 5 key factors to be analyzed:
- Threat of substitute products
- Threat of new entrants
- Bargaining power of customers
- Bargaining power of suppliers
- Rivalry among existing competitors
Together, the forces proposed by Porter help us better understand the structure of the organization, identifying weaknesses and strengths. Moreover, a more in-depth and targeted application of this tool can help us formulate better strategies and thus achieve truly sustainable competitive advantages. Let’s now delve deeper into each of Porter’s 5 Forces.
1 – Threat of Substitute Products or Services
This force seeks to understand if there is a possibility for customers to switch to products or services similar to those offered by the company. This change can occur for various reasons, but it especially happens when the new option offers good value for money.
An interesting example is the emergence of ride-sharing companies like Uber. Besides the convenience of having this service pick up and drop off people from home to their destination, they offer very attractive prices. As a result, public transportation companies (such as subways and buses) and taxi drivers have been losing more and more ground, being replaced by Uber or similar apps.
2 – Threat of New Entrants
While the previous force analyzes the possibility of new products or services emerging, this one focuses on understanding how easy or difficult it is for new organizations to enter the market and start offering the same products or services that we do.
Factors such as high startup costs, the existence of strict regulations, or even the strength of already existing brands can reduce or even eliminate this threat. However, when these so-called “barriers to entry” are weak, we need to invest more to protect ourselves (whether through marketing and branding campaigns or through innovation and improvement of our offerings).
3 – Bargaining Power of Customers
In the overwhelming majority of companies, the financial resources come from the customer and the purchases and contracts they make with our businesses. Therefore, this force aims to measure the influence that customers can have on prices and even the quality of products and services.
It is important to understand this force because in markets where the customer has high bargaining power, they can pressure prices down. This will require higher quality or even more offerings, which can reduce profit margins and put companies in a tough spot!
In this regard, it is common for customers to have more power when they can choose between several companies (a lot of competition) or when they buy in large quantities (negotiations in larger volumes).
4 – Bargaining Power of Suppliers
The fourth of Porter’s 5 Forces seeks to evaluate the ability of suppliers to increase prices or reduce the quality of products and services. When the supplier has a lot of power in this regard, they can end up directly influencing our companies.
This happens especially when there are few suppliers for the products and services we need for our operations. When they increase their prices, we need to increase our production costs and decrease our profit margins. On the other hand, if the quality of our suppliers’ deliveries drops, the quality of our final products will inevitably fall too!
5 – Rivalry Among Existing Competitors
The fifth and final force of Porter aims to understand the level of rivalry among competitors. It seeks to analyze how intense the competition is among the existing companies in the market.
In general, we can say that rivalry is higher when there are many competitors or when companies are of very similar size and capabilities. However, several factors can impact this analysis, as even markets with a large number of companies can be more amicable, while others can be more hostile even with a smaller volume of businesses.
In any case, the important thing to understand is that a high level of hostility can lead to price wars. This, in turn, will lead to increased expenses with marketing and innovation, which can considerably reduce profitability.
Porter’s 5 Forces – Holistic and Diversified Analysis
Many other tools can be mentioned when it comes to market analysis, such as SWOT analysis, the BCG Matrix, or even Value Chain Analysis. However, it is worth noting that the greatest differentiator of Porter’s 5 Forces is its ability to provide a holistic and structured analysis of the competitive environment as a whole.
Porter’s 5 Forces not only enable our companies to develop robust and sustainable strategies but go beyond that. This model helps understand the current position of the company and also allows predicting changes and proactively adapting to the increasingly voracious and ever-evolving market.
Therefore, using Porter’s Five Forces is essential for any company that wants to gain a deep understanding of its competitive environment, develop robust and sustainable strategies, and remain agile in the face of market changes. In other words, this tool is essential for any company that intends to stay in the market and grow even amidst the most complex contexts.
