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 the strengths and weaknesses of an entire industry, 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: Overview of Michael Porter’s framework

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 a particular 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 fundamental forces that shape the industry structure and 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 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. 

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 the five forces model Porter’s created involves evaluating the wider business environment and competitiveness 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, competition, and influence on an industry’s business strategy. It provides business leaders with the right tools for their 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 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 company’s competitive position 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. There can be fierce competitive rivalry 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. The airline industry is a good example of this.

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. 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 their investments in the company’s product development or digital 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 possess buyers’ 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 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 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

Making strategic decisions 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, 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 key technologies, and benchmarking competitors. 

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

Let’s see Porter’s Five in action by taking a look at one of Pakistan’s largest conglomerates “Engro Corporation Limited” (ECL). Their business model is split into multiple sectors like fertilizers, energy, petrochemicals, and even telecommunications.

So, here is how a hypothetical analysis would look like for them:

• Industry rivalry: The company’s position is in several markets, so it faces competition from different angles. Other large players like Fatima Fertilizer stand as notable rivals in the fertilization sector, but other local and international companies are also a threat to the company. Engro needs to stand out through innovation and efficiency and adapt at every corner to deal with the company’s competitive environment.
  
• Threat of new entrants: ECL is in an industry with a very high entry barrier – energy and chemicals require very high initial investments and a complex organizational structure. The company also takes advantage of economies of scale and established distribution networks. In effect, new players have little entrants’ bargaining power and would find it difficult to enter the market and compete.
  
• Threat of substitutes: With the rise of solar energy, traditional energy sources are starting to be replaced. This means that if ECL doesn’t adapt and add solar panels to their portfolio, one of their main sources of revenue may begin to dwindle. On the other hand, food and petrochemicals are products that can hardly be replaced.
  
• Bargaining power of buyers: Buyers have relatively high bargaining power due to the sheer amount of players in the industry. ECL, however, stands on its own reputation which significantly bolsters their continued sales figures. In a position like this, businesses can offer loyalty programs and discounts to retain its clients.
  
• Bargaining power of suppliers: Gas and chemicals are difficult to obtain and produce, which means that suppliers have some bargaining power and may demand higher prices. Again, ECL is a well-established brand and can arrange favorable terms with key suppliers and buy in bulk. Not only that, but a company with the sheer scale of ECL may decide to take the gathering of raw materials into their own hands and integrate production into their supply chain.

This is a simplified overview of the five forces Porter’s put out to the world through the lens of a large Pakistani 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.

Conclusion

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.