Michael Porter’s 5 Competitive Forces To Analyze The Competitive Environment

porter
Michael Porter, Harvard Business School – Credit: SAS Blogs

1. Rivalry Among Competing Firms

This is ” the scrambling and jockeying for position”, as Porter refers to it. This is a key component of competition analysis as it is essentially the reason for further and deeper analysis of the competitive market. This the point is where your business will look to gain competitive advantage on other businesses through price, quality of product, and speedy response to change by getting new products out to consumers. This will involve thorough investigation into the competing firms in your applicable market. Almost like a game of chess, you will need to anticipate the moves of your competitors while remaining vigilant of possible newcomers into your market as well.

2. Potential Development of Substitute Products and Services

In order to effectively maintain competitive advantage in the industry, your business must remain at the forefront of innovation. There will always be an outsider company that might attempt to overtake the competitive advantage by introducing a new concept or idea as a means of entering your market. For example, companies like Nokia, Samsung and Motorola were the industry aces in the cellphone production market for a very long time. Apple, a dominator in the computer manufacturing industry, shocked the system by entering the cellphone market with the invention of the Apple iPhone. Motorola and Nokia never saw it coming and were quickly overtaken. Samsung however, still remains a competitive force in the cellphone industry having topped Apple 4 out of the last 5 quarters. Why? Samsung was fully prepared for the entrance of Apple and responded instantly with their very own innovation, the Samsung Galaxy series. The development of the touchscreen, and the substitute of the Apple iPhone, all but erased Nokia and Motorola as industry competitors.

3. Potential Entry of New Competitors

As previously mentioned in step 1, your business must remain vigilant of newcomers to the market. The force of companies from other industries diving into your market is one that must not go unnoticed. Just as you will need to remain efficient at your analysis of the current competition inside your business market; you will need to apply that same analytical force to the preparation of those that might attempt to dive into your market from the outside, rather than from beneath. A prime example of this could be the XFL and its short-lived attempt at competing in the Professional Football market with the NFL. The NFL maintained their competitive advantage over the XFL by establishing control over the most crucial aspect inside professional athletics, talent. Unable to compete with the NFL for recruitment of talented prospective professional football players; the XFL collapsed from the inside out and was out of the market before their season ended. The XFL, a subordinate of the WWE, attempted to enter the Professional Football industry from way outside. The XFL attempted to establish competitive drive by using the same approach that brought them success with wrestling; they focused on creating characters out of their football players and staff. Although that approach was, and still is, extremely effective in the WWE wrestling industry, it was not effective in the football industry. The NFL was prepared for potential newcomers, outside and inside of the football industry, by successfully establishing dominance over the entry-level talent and recruiting.

4. Bargaining Power of Suppliers

As we have seen in many instances across the business world, if your company is selling a product then your company’s success is entirely dependent on your suppliers. How dependent on your supplier is your company? Suppliers, in all industries, can establish significant bargaining power over the companies they supply if those companies have no sufficient supplier alternatives. To successfully apply analytical force to this step, your company must maintain alternative supplier avenues. Be careful as this is not as simple as deciding to hire factoryB if factoryA ever fails to meet expectations or try to assert bargaining dominance over your business. It is crucial that you also anticipate the bargaining power your industry competitor’s suppliers might have over them and what alternative manufacturing medium they might turn to respectively.

5. Bargaining Power of Consumers

Just as suppliers can gain bargaining power over your business, consumers in the market can issue bargaining power the same. In any industry, with any product, competing with any firms; consumers and their loyalty will ultimately define the success of your business. Long-term success in maintaining competitive advantage in the market is only possible by fortuitously delivering product satisfaction to each-and-every consumer. Consider Apple iPhone, their insurmountable success in the cellphone industry can all be traced back to their product and the exceptional satisfaction that cellphone consumers find in purchasing their devices. Apple does this by ensuring that each and every iPhone that hits the market is absent flaws and at the peak of cutting edge technology. Every year, sometimes twice a year, Apple delivers a brand new iPhone fitted with unparalleled technological innovation. Apple also guarantees consumer satisfaction by taking care to drop software upgrades that keep their older generation model iPhones just as competitive as their newest. All-in-all, your industry consumers hold bargaining power in their ability to drop your product and purchase another at any moment. It is crucial that your business thoroughly evaluate Porter’s 5th force inside your industry, therein developing the unprecedented consumer loyalty that Apple owns, as a means of defending against fluctuations in consumer bargaining power.

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