How To Use Porter’s Five Forces Analysis For Competitive Advantage

To maintain competitive advantage for your business, you need a better understanding of your business strategy. You would need to use Porter’s five forces competitive advantage analysis to do that. 

Suppose you want to determine an industry’s strengths and weaknesses, identify its structure, and determine corporate strategy. In that case, you might want to dive into this article, as we will elaborate on the purpose of Porter’s five forces analysis and the steps to perform it. 

Let’s get started.

Introduction to Porter’s Five Forces Analysis

Porter’s Five Forces Analysis was developed by Harvard Business School professor — Micheal E. Porter in 1979. This analysis serves as an essential tool for understanding the competitive force within an Industry. 

In 1979, Micheal E. Porter developed and published “How Competitive Forces Shape Strategy.” You can find this article in the Harvard Business Review or Harvard Business School publications. 

In the article, Porter argued that people often viewed competition way too narrowly. As a solution, he came up with five (5) fundamental forces that shape the industry structure and analyze the competitive intensity of an industry. Along with that, he created the three generic strategies for success.

These forces are essential, especially if you are a business owner because they can affect your industry’s long-term profit potential and attractiveness. Industry attractiveness in this context refers to the all in all industry profitability. 

The five competitive forces in Porter’s model are competitive rivalry, the threat of substitutes, the threat of new entry, supplier power, and buyer power. Some include a sixth force, namely “complementors”.

Before we dive into each force, you need to know that the primary purpose of Porter’s five forces model is to evaluate the root causes of an industry’s or company’s profitability.

Conducting a Competitive Analysis

Conducting a competitive industry analysis through Porter’s five forces model involves evaluating the competitive environment of an industry and the industry’s economy as a whole. More specifically, it’s a micro environment framework.

This competitive strategy applies a structured approach to understanding the five forces that shape strategy, competition, and influence on an industry’s business strategy.

Some of the steps in the competitive analysis are:

• Identifying industry competition;
• Gathering information about existing firms and competitors;
• Analyzing findings and assessing the implications of the five forces model;
• Identifying opportunities and threats by doing a SWOT analysis;
• Formulating business strategies. 

By using the five forces model, business owners like you can gain a deeper understanding of the competitive position of your industry and gain a competitive advantage. 

Now, let’s understand Porter’s five forces framework better.

Assessing Industry Rivalry

Rivalry among existing competitors is a part of Porter’s framework. This force examines the intense competition in the marketplace. 

Rivalry is determined by the number and size of your competitors or the existing companies with the same niche market as yours. It is also determined by the industry growth, product differentiation, and exit barriers. 

Rivalry is high, especially when many competitors are equal in size to your company or business; even if you have more power, a competitor will still be roughly equivalent to your size. The competition is fierce when the industry grows slowly because it increases the fight for market share. 

When you and your competitors have identical products and services, rivalry is deemed intense, too. When rivalry is intense, competitors are most likely to use corporate strategies like advertising and price wars, which can hurt your business’s bottom line.

Ultimately, it turns into a game of numbers, such as: how many buyers can you attract while cutting costs, utilizing your suppliers’ bargaining power to acquire raw materials at better prices in order to get ahead and maintain, if not grow, your share on the market.

Analyzing the Threat of New Entrants

New entrants in an industry bring a desire to gain market share that puts competitive pressure on costs, prices, and rates of investments. Simply put, when new entrants exist, you will have to share the pie with the newcomer and lose market share. The seriousness of the threats of new entrants depends on the entry barriers. 

If there are strong and durable barriers, there’s a lower chance that new entrants or direct competitors will enter the competitive landscape. Some examples of barriers to entry are customer loyalty for existing large organizations or brands, economies of scale, large capital scales, etc. 

If new competitors enter the industry’s economic landscape, existing players like you might need to increase your investments in the company’s product development or marketing to stay ahead, among others. 

Assessing the Threat of Substitutes

This force means that substitute products perform or do the same function as your industry product in a different way. In simpler terms, the product may not look identical to your product, but it has the same function. 

Customers tend to switch to other products if they feel that it performs the same functionality but is much cheaper or simply based on preference. 

Cheaper competitors with substitute products tend to attract a large customer base because many people are prone to buying more affordable products because of the economy now. 

Substitute products tend to lure customers away from your industry, so you need to take good notice of everything to make your business as attractive as possible to keep your loyal customers. Pure competition might arise if you tend to belittle substitutes. 

Evaluating Supplier Power

This force analyzes how much control and power a company’s supplier has over the possibility that they might raise their prices, have switching costs, or reduce the quality of the services or purchased goods. This, in turn, affects an industry’s profitability potential. 

The number of suppliers to choose is vital in determining supplier power. Fewer suppliers usually means more opportunities to foster a strong professional relationship. The stronger your relationship with your supplier, the more power you hold.

Do not underestimate the multiple suppliers’ bargaining power. That is why building a good relationship with them is super important. 

Analyzing Buyer Power

This force analyzes whether customers or buyers have the power to put the company under pressure by demanding better quality, etc. Customers also have the power to switch from one company to another. 

Buyer power is low when customers purchase in small amounts. Because of the innovation of the internet, customers can now compare products and prices over the internet and get the product based on their preferences. 

If you want your business to be successful, especially when it is reliant on customers and buyers for profit margin, you need to cater to their needs and demands because they also have the right to bargaining power. 

In fact, buyer bargaining power can be crucial if you are working with high volumes of customers who make purchases regularly. That being said, if your industry’s structure is significant and does not rely on strong buyer power, your business is also likely to stay uninfluenced. 

Identifying Competitive Advantages

Many established companies consider identifying competitive advantages as part of their crucial strategic planning. These advantages will help your company stand out from its competitors.

Key elements in identifying competitive advantage are:

• Cost leadership;
• Unique value proposition;
• Product difference from others
• Strong reputation and branding;
• Strategic alliances;
• Customer experience, etc.

To identify these advantages, market analysis is an essential business practice. You and your business strategists can do SWOT analysis, benchmarking, competitor research, etc. 

It is important to identify your industry’s competitive advantage because it would establish a strong market position for your business, determine the number of buyers of your goal, and achieve sustainable and constant growth in the business world.

Strategic Decision-Making

Strategic decision-making is also a foundation for every successful business operation. This involves choosing the right course of action to achieve organizational goals and gain a spot in the competitive landscape of the marketplace. 

It involves identifying risks and relevant government policies, making various alternatives or backup plans, and making decisions for the long-term objective. 

Continuous Monitoring and Adaptation

Monitoring and adapting are continuous processes for your business if you want it to stay responsive and resilient to the always-changing market dynamics, trends, consumer preferences, consumer behaviors, etc. 

Market surveillance is important for intense monitoring, like tracking performance metrics, getting customer feedback, leveraging new technology, and benchmarking competitors. 

Examples of Porter’s Five Forces Analysis using US companies

Let’s see Porter’s Five in action by analyzing industries and companies of a completely different nature: Southwest Airlines and Etsy, Inc.

Southwest Airlines

This is a major American airline that operates on a low-cost carrier model, which essentially means that expenses are kept to a minimum. Let’s look at the different factors affecting profitability and competition via Porter’s model.

• Industry rivalry: The entire industry of air travel is intensely competitive with major players like American Airlines, Delta Air Lines, and more. Established rivals compete for routes and customer loyalty. Pricing wars are common (as this is an industry with high fixed costs), but the economic approach to flight of SA puts them at the forefront of choices for many American passengers.
  
• Threat of new entrants: In order to join the airline market, potential entrants must possess a lot of resources. The barrier to entry is immensely high – from buying aircraft to establishing routes, building a brand and setting up an incredibly complex organizational structure. And unlike niche markets, there is plenty of competition to go against that makes it extremely difficult to start.
  
• Threat of substitutes: There is a moderate level of such threat. While there are other travel options, flight is still preferable for long-distance voyages. However, one must consider technological advancements such as online conferences and communities, making it easy to join events digitally, that were once only available by travel.
  
• Bargaining power of buyers: The mere existence of aggregator websites provides a large buyer’s cost bargaining power. Being able to compare the pricing and conditions of different airlines within a single web page makes the pool of choices plentiful. This is especially the case in the given industry price sensitivity.
  
• Suppliers bargaining power: Plane manufacturers that dominate the market are few, and since quality and safety are such a priority, they have some bargaining power. Airlines also require raw materials like fuel, as well as maintenance services. Suppliers’ bargaining power thus varies.

In conclusion, Southwest Airlines is positioned in a particular industry that is extremely competitive and must constantly adjust to customer expectations and economic factors that are relevant today. 

Etsy

Etsy is an ecommerce platform, focused on providing an easy-to-set-up shop for handmade, vintage, and unique products by smaller companies or independent creatives. Let’s analyze them using the five forces analysis Porter’s created.

• Industry rivalry: With rivals such as Shopify, Amazon and Facebook marketplace, Etsy faces strong competition. On the other hand, Etsy is unique in its market positioning and has established itself as a niche player within the wider industry. That, as well as the fact that many people sell their goods on multiple platforms at once, makes industry rivalry moderate.
  
• Threat of new entrants: Here, the threat of new entrants is relatively low, as creating a niche marketplace platform is extremely low. A successful business such as Etsy has seized the niche and it would be very difficult for a new platform to build a similar brand. Building such a platform also requires a lot of resources, creating a network of initial sellers, and investing in marketing and customer service.
  
• Threat of substitutes: Customers can buy similar goods in person or through other ecommerce platforms and even social media. So on a surface level, there are substitutes. However, Etsy’s core messaging centers around supporting creatives – their unique value proposition maintains a healthy community of buyers and sellers who continue to make the company profitable.
  
• Bargaining power of buyers: It’s important to consider that the users of Etsy fall under two different categories: artisans and customers. In this case, customers are buyers, and their choice of buying handmade jewelry, for example, may be limited, especially if they wish to support a specific creator. Product availability, quality, pricing, and customer service, however, often rely on the sellers, which may be out of Etsy’s control, yet affects bargaining power, making this one of the unpredictable fleeting factors.
  
• Suppliers bargaining power: Etsy’s suppliers are also its seller users. Artisans take advantage of a fair pricing structure and constantly receive resources on how to improve their business which leads to constant value, reducing bargaining power and dissatisfaction. Again, being able to list your products on multiple websites, including Etsy, also removes a lot of the pressure of choosing between many platforms.
  

Overall, Etsy operates in a competitive environment with low threats of new entrants and some possibility of substitutes. The USP provides the company with some security in the form of a core brand message, which attracts and retains revenue. The community-oriented approach makes this a sustainable hub for creatives and connoisseurs alike.

The Bottom Line

Porter’s five forces model goes beyond the basics of competitive analysis by expanding the landscape and including dynamics between buyers, suppliers, manufacturers, new entrants, substitutes, etc. 

It is a beneficial tool used for market investments; while it is not perfect, it is still more than good enough for planning small investments. 

Porter’s model became widely known because it pushes companies to look beyond their own established business and to their industry group when making long-term decisions for the company. 

It is easy to understand and use and provides a better overview of your competitors. Remember, you can do Porter’s analysis independently or with a group; it is easy, comprehensive, and an excellent tool for your company. Best of luck.