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Business Strategy Tool
The tool was created by Harvard Business School professor Michael Porter, to analyze an industry's attractiveness and likely profitability.
Since its publication in 1979, it has become one of the most popular and highly regarded business strategy tools.
Porter recognized that organizations likely keep a close watch on their rivals, but he encouraged them to look beyond the actions of their competitors and examine what other factors could impact the business environment.
He identified five forces that make up the competitive environment, and which can erode your profitability.
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1) Threat of New Entrants
- Consider the ease with which new companies can enter the market.
- Many factors need to be considered, such as barriers to entry (patents and high set-up costs), the profitability of the business, and the brand's reputation.
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2) Threat of Substitute products
- Analyze how easily your products can be substituted with others.
- It will depend on factors such as its relative price, accessibility, and quality.
- All alternatives should be considered, not just similar products.
- As an example, airlines compete not just with other airlines, but with train and bus operators as well.
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3) Bargaining Power of Buyers
Analyze your buyers' strengths.
- Do buyers have the upper hand in this market?
- Can buyers easily switch brands?
- Could some of your customers be in such a strong position to make you vulnerable?
- What impact will it have on your company if you're dealing with businesses with low-profit margins?
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4) Bargaining Power of Suppliers
- Know how strong your suppliers are.
- Is there a supplier you are dependent upon?
- Is there anything you can do to reduce this?
- What are the chances that the supplier would be able to sell directly to your customers if it did not depend on your business?
- Is there an alternative product or method you could use to reduce your vulnerability?
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5) Rivalry among Existing Competitors
- In industry analysis, it is important to understand who your competitors are and how you compare them.
- From the outside looking in, it may seem that everyone is a competitor.
- However, take a closer look and you will find that there are both direct and indirect competitors depending on the industry.
- For example, the direct competitor for Netflix is Amazon Prime, Disney+, Hulu, etc but its indirect competition is in games such as PUBG, Fortnite, etc.
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IDEAS CURATED BY
CURATOR'S NOTE
Porter's Five Factors is a model that identifies and analyzes five competitive forces that define every sector and aid in determining an industry's strengths and weaknesses.
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