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.

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. It 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 that shape the industry structure and analyze the competitive intensity of an 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.

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 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 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 there are no high switching costs associated. That is also why 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.

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. 

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 key technologies, and benchmarking competitors. 

An example of Porter’s Five Forces Analysis with a Singaporean 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 a look at an analysis of the telecommunications leader in Singapore – Singtel:

• Industry rivalry: The telecommunications sector in Singapore is occupied by several major companies, indicating concentration is low. Singtel is at the forefront, followed by StarHub, and M1. The competitive rivalry, in this case, may be intense, but competition itself is low.
  
• Threat of new entrants: The entry barriers within the telecommunications industry is high due to the initial capital investment required, which would mean new entrants would have to get enormous investments or have extremely innovative approaches to compete.
  
  Singtel is expanding and its client base of millions, along with other operations, gives it a huge capital advantage. All of this considered, the threat of new entrants seems low.
  
• Threat of substitutes: Users who wish to change their contracts for other company’s services can do that much more easily than in the past. As services become cheaper, more accessible and saturated, consumers get to substitute a telecom company without much effort.
  
  Singtel has found other ground on which to prove itself, such as companies in the cybersecurity and marketing industries, as well as a venture fund for startups. This provides it additional stability that is otherwise under the scope of a moderate threat of substitutes.
  
• Bargaining power of buyers: Customers in this industry are concentrated, and they are both individuals and corporate buyers. Individuals tend to have more restricted buying power due to their income compared to corporate customers, which makes the overall customer bargaining power low.
  
• Bargaining power of suppliers: The telecom industry has two main suppliers – labor and network equipment providers. There is no high concentration of suppliers and their revenue relies on companies like Singtel using their services. Many experienced workers are in this sector, which also makes it difficult for labor suppliers to have high bargaining power.

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

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. 

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.