Porter Five Forces Analysis: Competition Analysis in Marketing

Define Porter's Five Forces

Porter's Five Forces is a simple but powerful tool that you can use to identify the main sources of competition in your industry or sector. When you understand the forces affecting your industry, you'll be able to adjust your strategy, boost your profitability, and stay ahead of the competition. For example, you could take fair advantage of a strong position or improve a weak one, and avoid taking wrong steps in the future (Kabeyi, 2018).

Porter's Five Forces Framework is a method of analyzing the operating environment of a competition of a business. It draws from industrial organization (IO) economice to derive five forces that determine the competitive intensity and, therefore, the attractiveness (or lack thereof) of an industry in terms of its profitability (Bruijl and Gerard, 2018).

Examples of Porter Five Forces Analysis.

Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low because the industry's underlying structure of high fixed costs and low variable costs afford enormous latitude in the price of airline travel (Kabeyi, 2018). Airlines tend to compete on cost, and that drives down the profitability of individual carriers as well as the industry itself because it simplifies the decision by a customer to buy or not buy a ticket. A few carriers – Richard Branson's Virgin Atlantic is one – have tried, with limited success, to use sources of differentiation in order to increase profitability. Customer switching costs – These are well illustrated by structural market characteristics such as supply chain integration but also can be created by firms. Airline frequent flyer programs are an example.

Characteristics of Porter Five Forces Analysis

Five forces analysis looks at five key areas mainly the threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry. Porters model of Five Competitive Forces allows a structured and systematic analysis of market structure and competitive situation. The model can be applied to particular companies, market segments, industries or regions. Therefore, it is necessary to determine the scope of the market to be analyzed in a first step. Following, all relevant forces for this market are identified and analyzed Hence, it is not necessary to analyzer all elements of all competitive forces with the same depth (Min et al. 2018).

The Five Forces Model is based on microeconomics. It takes into account supply and demand, complementary products and substitutes, the relationship between volume of production and cost of production, and market structures like monopoly, oligopoly or perfect competition. The Five Forces tool is a simple but powerful tool for understanding where power lies in a given business situation. This is important, as it helps you understand both the strength of your current competitive position, and the strength of a position you’re looking to move into (Kabeyi, 2018).

With a clear understanding of where power lies, you can take fair advantage of a situation of strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of your business planning toolkit (Bruijl and Gerard, 2018).

Advantages and Disadvantages of Porter Five Forces Analysis.

Advantages:

1) Helps to Estimate the Competition in the Industry

Porter’s five forces help to measure the threat of new entrants, the threat of substitution, supplier bargaining power, and buyer bargaining power. All of these will sum up to provide the competitive rivalry of the industry.

2) Showcase where the Strengths and Threats Exist

Porter’s five forces provide the output of understanding the supplier and buyer forces with risk of new entrants and substitute products. This will enable the senior management to find out where does the company’s strengths place in and where does the threat exist (Min et al. 2018).

3) Identify which Entities Holding the Power

There are three entities to which Porter’s Five Forces are related. Those are suppliers, buyers (consumers), and competitors. This analysis will provide insights into which are entities hold more power and less power.

4) Display Opportunities to Expand the Business

Porter’s five forces provide the power of suppliers and buyers in the industry. This will help the company to make decisions on whether to proceed with verticle integration to acquire suppliers and buyers to reduce their power and expand the business (Isabelle et al. 2020).

Disadvantages:

1) Limitation on the Composition

Porter’s five forces only concentrate on the power of suppliers, power of consumers, substitution, and new competition. But other technological factors and business strategies that impact the company are not considered. As an example, technological evolvement is one of the biggest threats for all companies across all industries (Min et al. 2018).

2) Unavailability of Quantitative Dimensions

There is no built-in method to conduct the quantitative analysis of the external factors. This tool does not provide a quantitative idea of the depth and impact of the five forces described. Also, there is no quantitative idea of which forces out of the five are most important and least important.

3) Impractical to use on Large Companies

Practically it is difficult to use this analytical framework for a company that has a large product portfolio and operates in different market segments. This framework is meant to analyze a company in a single industry (Indiatsy et al. 2014).

4) Can Be Used as Starting Point for the Analysis

Porter’s five forces is a simple tool that contains five external factors which can be beneficial or else drawback for a company. This can be used only as a tool for the starting point of a deep investigation. This framework provides the initial understanding of the company’s competitive position in an industry.

5) Not Applicable for All Industries Universally

Porter’s five forces practically cannot be used for some industries. As an example, not-for-profit companies cannot use this method for the analysis. Also, companies conducting activities like R&D will not have much benefit from this (Min et al. 2018).

6) Not Consider Business Risk Factors

External business risk factors like foreign exchange instabilities, natural catastrophes, methods of financing, legal constraints, fast technological evolutions, fluctuations in interest rates, etc not considered for this framework (Isabelle et al. 2020).

What are The Scope Of Porter Five Forces Analysis In Marketing?

It is a model used to explore the environment in which a product or company operates. Five forces analysis looks at five key areas mainly the threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry (Isabelle et al. 2020).

References:

Bruijl, D. and Gerard, H.T., 2018. The relevance of Porter's five forces in today's innovative and changing business environment. Available at SSRN 3192207.

Indiatsy, C.M., Mucheru, S.M., Mandere, E.N., Bichanga, J.M. and Gongera, E.G., 2014. The application of Porter’s five forces model on organization performance: A case of cooperative bank of Kenya Ltd.

Isabelle, D., Horak, K., McKinnon, S. and Palumbo, C., 2020. Is Porter's Five Forces Framework Still Relevant? A study of the capital/labour intensity continuum via mining and IT industries. Technology Innovation Management Review, 10(6).

Kabeyi, M.J.B., 2018. Michael porter’s five competitive forces and generetic strategies, market segmentation strategy and case study of competition in global smartphone manufacturing industry. IJAR, 4(10), pp.39-45.

Min, C., Liangwen, L. and Yue, X.G., 2018. New Thoughts on Porter's" Five Forces Model" from the Perspective of Innovation. IETI Transactions on Social Sciences and Humanities, 1, pp.105-113.