Establishing and managing a business isn’t a cakewalk. There are a number of factors that play a crucial role in this and can most definitely end up influencing the overall profitability and growth of the business in the long run. Having a said tool that further propagates and helps with gaining better insights and knowledge about the forces that drive competition makes the process of gaining profits a lot easier.
In here, we are going to be discussing about Porter’s Five Forces Model, gain better insights into the involved attributes and analyze how it can be implemented into a business model.
What is the Porter’s Five Forces Model?
For those who aren’t aware, the Porter’s Five Forces Model is a business tool that helps in understanding the competition surrounding your business better and even finds more insights about the possible profitability surrounding the said venture.
The reason why this is considered so useful for any niche or any kind of business model is because of the fact that it helps you get better ideas on the forces driving competition and influencing the competition, thus helping you tweak your strategies in accordance to that.
To put it lightly, this helps you further emphasize your strong potential that could be channeling in more profits or even cut down the weak points that could be dragging your business’ credibility down.
Elements in the Porter’s Five Forces Model?
Now that we have provided you with a basic rundown of what the Porter’s Five Forces Model is all about, the next thing in line is to know about the varying attributes and elements involved in the same.
Before that, getting a bit of a background information about the tool or the business model can further help you stay informed. The tool was developed in 1979 by Michael Porter who was a Harvard Business School professor. He predominantly developed this to analyze the overall attractiveness of the industry and the likely profitability involved in it.
Ever since its inception, it has become a very popular model among the businessmen and the enthusiasts to talk and use.
According to Porter, he believed that the professionals need to look beyond what their competitors are doing, as that is often the sole factor that the business professional do indulge in. Looking beyond what the rival is doing helps channel in better results. He propelled them to examine the other factors that could be influencing the progress and the process of the business’ growth and profitability.
Explaining those, he sorted out five forces in the business model and hence the name Porter’s Five Forces Model.
The very first and possibly the pivotal factor involved in this model is the prospect of competitive rivalry. This looks into both of the numbers and the strength of your competitor. In this, you need to analyze the number of competitors you have, the kind of place they have in the market and even the number or quality of products that they are manufacturing.
In places where the rivalry is extreme, the companies or the business professionals can successfully attract more customers with the aid of price cutting but it needs to be done strategically, to ensure profitability. The use of high impacting marketing campaigns also has importance in this prospect.
In addition to that, when you are in a niche with a lot of rivals, there are chances that you might lose your suppliers and buyers to someone else if your products and services aren’t up to the mark.
In contrast to that, you are likely to own the market if you have a less number of rivals and competitors in the market. This lets you thrive alone and dominate the market till the next big thing comes along.
The next thing in question is the supplier power. This prospect is determined by the ease of method for your suppliers to hike the prices of their resources. In this aspect, there are some questions that you should have in your mind regarding your suppliers, including the number of suppliers you have, whether they provide with unique resources and even the amount you would need if it is needed for you to switch suppliers.
If the number of suppliers in your market niche is abundant, switching to another cheaper alternative for a supplier won’t be a tough job. But, on the contrary, if the same is very rare, chances are that the supplier’s demand is more, so they are not just likely to hike the prices but you would find it difficult to switch to a different one for a cheaper price with same level of quality.
The sudden increase in the pricing of the supplier can most definitely affect your profitability.
The next thing that is important to focus on is the buyer power. In this, you need to analyze the percentage of buyers you have, the kind of prices that they are willing to pay and even the loyal buyers who are likely to come back and make a different purchase.
If you have limited customers, chances are that they will have an upper hand but the same changes when you have a good batch of customers, especially the repeating ones.
Threat of Substitution
Our life is always charged with the threat of substitution, be it in the personal or even the professional foreground. This, in the Porter’s Five Forces Model, is defined by the likelihood of your customers finding an alternative for you and opting for their services instead of yours.
This kind of a transition or a substitution is mainly charged when there are ample numbers of competitors in the market. The difference in the price point for the same product or service is one of the pivotal reasons why this could happen.
Threat of New Entry
Lastly, the most important and overlooked element is the threat imposed by a new entrant in the market. Even though many business professionals believe that newbies aren’t a threat as customers tend to rely on the OG brands, the same is changing with every single day.
The new entrants in the market often tend to come up with better marketing schemes and even better and reduced price points for promotions, which is likely to attract the attention of the users.
How to use the tool?
While now that you are aware of the elements involved in the Porter’s Five Forces Model, it is time that you know how to use the tool to churn better results and profitability.
In here, the process does comprise of three segmented steps. Each of the step has a very crucial role to play that you possibly can’t miss out on.
Gather the Intel
Now that you know the varying elements or the five forces included in this model, you need to work on those. The first step is to gather information with respect to all the five forces that we have mentioned. This is the part where the market research team in your company will come into play.
Get information involving all the small elements, ensuring in-depth knowledge of each and every single competitor and the kind of possible future changes that are likely to happen.
Once you have all the information laid out in front of you, the next thing that one needs to do is analyze the results opted. It is very important that you lay out all the possible insights onto a diagram to get a better visual representation of the things involved. It is important that you analyze the ways each one of the forces would impact the business in the market.
It is important that you understand for a fact that the five forces have varying impacts on varying industries which is the reason why it is important that you analyze things in accordance to your business model.
Work on Strategies
With everything drawn out and analyzed, the last step is to work on the strategies that would help strengthen the positive points and get rid of the loopholes that could be affecting the overall profitability. It is necessary that the managers work with the available data to draw out palpable strategic methods to drive growth and better profitability for the business.
If you have been wondering how to drive better growth for your business and channel in more profits, the Porter’s Five Forces Model can provide with better insight into the prospect. Make sure that you do focus on all the five elements and sit down to analyze them and come up with a plan of action accordingly.