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. Suppose you want to determine the strengths and weaknesses of an entire industry, identify its structure, and create a corporate strategy.

Using Porter’s five forces analysis, you can not only find out what your competitive advantages are, but also how each industry force affects them. This article elaborates 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: Overview of Michael Porter’s framework

In 1979, Harvard Business School professor — Micheal E. Porter developed what we now know as Porter’s Five Forces Analysis, which serves as an essential tool for understanding the competitive forces within a particular industry. 

Porter published his research under the title of “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 existing competition way too narrowly. As a solution, he came up with five fundamental forces he has found to shape every industry structure and can be used to analyze the competitive intensity of a given industry.

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 overall 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. 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 profitability or an individual company’s profitability.

Around the same time, Porter goes on to define several generic strategies that can be pursued in order to gain competitive advantage. They all take on aspects of the business that can be turned into advantages.

These three generic strategies are referred to as cost leadership, differentiation, and focus. While discussing the five forces, at times, we also slightly touch upon certain sides of a strategy.

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. 

This competitive strategy applies a structured approach to understanding the five forces that shape strategy, pick out the strong competition, and influence business leaders’ decision-making process.

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 framework, you can better grasp the competitive position of your industry and work out crucial factors that can bring you sustained profit in comparison to competitors, such as leveraging absolute cost advantages, controlling high fixed costs, and much more.

Assessing Industry Rivalry

Rivalry among existing competitors is a part of Porter’s five forces 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 within the same niche markets. 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 likely to rely more than ever on 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

The coming of new entrants usually means existing companies can lose market share more easily. That puts competitive pressure on costs, prices, and rates of investments. 

Simply put, when new competitors make their appearance on an industry market, you will have to share the pie with them. The seriousness of the threats of new entrants depends on the entry barriers. 

The higher the entry barriers, the lower the 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 exhibit what is called buyer propensity to substitute when they lean towards switching to other products they feel that perform the same functionality but are cheaper or are closer to their preferences. 

Cheaper competitors with substitute products tend to attract a large customer base because many people are prone to buying more affordable products. By analyzing industries, you get a distinct idea of where the boundary for the average customer lies in terms of switching companies.

Substitute products can also lure customers away from your industry, so you need to take good notice of everything to make your business as attractive as possible. That way, you get to keep your loyal customers. Pure competition may 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.

Never underestimate the supplier bargaining power. That is precisely why building a good relationship with them is so important. When you can rely on said supplier power, you also have the advantage during other stages of negotiation.

Analyzing Buyer Power

This force analyzes whether buyers (customers) 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.

The buyer’s cost – or how much leverage buyers have when negotiating prices and terms – is defined by several factors. 

They can be summarized as such: 

• Number of buyers relative to suppliers;
• Buyers’ price sensitivity;
• Standardization of products;
• Importance of individual buyers;
• Buyers’ information availability;
• Switching costs.

Generally speaking, 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 in order to get the most fitting company’s products based on their own individual 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 that 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 advantages are:

• Cost leadership;
• Unique value proposition;
• Product difference from others
• Strong brand identity;
• 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 favorable 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

The foundation of every successful business operation is made of several skills. One of them is being able to make strategic decisions.

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, 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, including tracking metrics like relative price performance, getting customer feedback, leveraging new technology, and benchmarking competitors. 

An example of Porter’s Five Forces Analysis with a Malaysian company

Implementing the forces analysis Porter’s proposed requires diving into an industry. Then, we can look at a given company’s performance in it. 

For this example, let’s take Strategic Management and Project senior Loo Pei Yi’s analysis on the flag carrier of Malaysia – the Malaysia Airlines Berhad:

• Industry rivalry: More and more airlines in Malaysia are fighting for market share. The industry itself was largely affected due to travel bans starting 2020, and MAB also faced a landslide. Since then, competition among regional airlines has been more intense, with high fixed cost being one of the most prevalent factors. While overall competition numbers are low, rivalry intensity is high.

• Threat of new entrants: The entry barrier to the airline industry is high because of the high capital investment requirements. New entrants need to be able to communicate through the right channels with perfect timing and have meaningful offers in order to be on par with existing airlines who aim for customer retention. Thus, the threat of new entrants is low.

• Threat of substitutes: Airlines are only one of the ways for transportation. Railway and other services may be chosen as substitutes for intercity travels due to their comparatively lower pricing, but when factors such as time and accessibility are taken into account, on an international level, airlines are less likely to be replaced.

• Bargaining power of buyers: Low-cost carriers in Malaysia gained popularity during the 2010’s. Malaysia Airlines prices are relatively high, so launching a subsidiary company was the way to go. To match the quality of the service offered by competitors , it further redesigned its Golden Lounge. While buyers’ bargaining power would be on the higher end, the company has adapted and managed to retain customers.

• Bargaining power of suppliers: Jet fuel suppliers are the main ones air companies turn to. There are only a few of them and there are government regulations on the prices, so there’s not much they can bargain over. Aircraft suppliers are led by two companies (Boeing and Airbus), and Malaysia Airlines is using one of them primarily. The bargaining power in that case is higher, as there would be much higher switching costs associated with replacing dozens of aircraft.

This is a simplified overview of the five forces Porter’s put out to the world through the lens of a large Malaysian company. If you want to perform your own analysis, you have to make sure to dive deep enough into each force and extract valuable data for your industry of operation.

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. 

External factors such as the five forces are considered to be more valuable in the overall decision-making process. The reason is that it contrasts with fleeting factors such as technological innovations and industry growth rates.

After all, in business, what is relevant today may not be relevant tomorrow. However, as time has proven, both tectonic and minuscule changes in an industry tend to all be dictated by the same forces.

Porter’s model became widely known because of that. It pushes companies to look beyond their own established business and to their industry group whenever they have to make long-term decisions for the company. 

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.