Earlier this week we talked about how a PESTLE analysis can help you keep track of the large-scale factors which can impact your business. We’re talking about the big things, like government policies, laws and even the culture you operate in!
But what about when you want to analyse your immediate market, or one you were thinking of moving into? This is where Porter’s 5 Forces can help. These were developed by Harvard Business School professor, Michael Eugene Porter.
Working through and thinking about each force will help you build up a good picture of the kind of environment you’ll find yourself operating in. So let’s take a look at each one in turn to see how exactly it can help you to master your market!
1. Bargaining power of suppliers
How powerful are the suppliers you have to deal with? This comes down to how many are on offer to choose from.
If there aren’t many to choose from then their power increases, since you won’t have the option to go elsewhere. They’ll be able to charge a higher price, and you’ll be powerless to stop them. On the other hand, if you have plenty of choice then you’ll be in a position to shop around and get a much better deal, boosting your profit margins across the business.
2. Bargaining power of buyers
How powerful are your customers? This is partly driven by how many of them there are. If you only sell to a few high-value clients, then they’ll be extremely powerful, since they’ll know that you can’t afford to lose them.
But at the same time, large groups of buyers can be powerful. If they band together, then they could potentially pressure a seller to change its prices or operations. You should factor this in when moving into markets with strong consumer groups, for example.
3. Competitive rivalry
Who is already trading in your industry? These people are going to be after the exact same customers as you are, so you’ll be in direct competition. Having a large number of competitors will mean that you’ll have to lower your profit margins in order to stay competitive, whereas fewer competitors could allow you to keep the margins a bit higher.
Not only that, but when entering a new market you’ll be competing against people who already have already established a foothold. In a lot of cases, you could be competing against enormous brands known by just about everyone on the planet, so you need to be aware of exactly what you’re signing yourself up for!
4. Threat of new entrants
How easy is it to enter your industry? Maybe there isn’t much competition at the moment, but do you want to invest a lot of time and money into a market which could get flooded with products in the near-future?
Some industries will be much harder for new competitors to enter than others. For example, entering the car manufacturing industry requires a huge amount of money, whereas a savvy web designer can easily get started by themselves.
5. Threat of substitute products
What alternatives are there to the product or service you’re offering? We’re not talking about your competitors’ versions of your products here, but about completely alternative services which your customers could potentially turn to.
So, for example, a car manufacturer will be competing against other car manufacturers. But there’s also the possibility that their customers will decide against a car in favour of walking and using public transport. These substitutes need to be considered just as much as your direct competitors do, so that you can plan how to sway customers away from them and towards you!
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