To run a successful business, it is necessary to take into account many factors that often escape the attention of entrepreneurs. However, if you study economics more carefully and diligently, you will learn a lot of different approaches that allow you to competently and effectively analyze financial activities. One of the most interesting examples is the analysis of Porter's 5 forces, an example of which will be discussed in detail in this article. But first of all, you need to figure out what it is, what it is focused on and what it will allow you to achieve. You can be sure that you will definitely need a tool like Porter's 5 Forces Analysis. The examples in the text will serve as a clear confirmation of this.
What is this?
This model was described in 1979 by the famous economist Michael Porter. He did this in order to create a complete model that would allow the company to analyze its productivity and competitiveness, and in the future also maintain these indicators at a high level. Nearly forty years later, you can see how well Porter's 5 forces analysis works.
Examples of its use in life are very diverse. Such an analysis is used by factories, restaurants, banks, and other enterprises that have competition in the market. Accordingly, if you want your business to be successful, you need to think about how to study this model. And this article will help you figure out what Porter's 5 forces analysis is. Examples of its use will also be presented to your attention. The second half of the article will be devoted to one large example step by step.
Model description
When Michael Porter created this model, he stated that there are five different forces in the market, each of which determines the competitiveness of a product:
- the bargaining power buyers have in a particular segment;
- Supplier bargaining power that affects the supply of raw materials to businesses;
- the threat of new entrants entering the market to increase competition;
- danger of better value for money substitutes;
- level of competition within the selected market.
This is Porter's 5 powers. An example of analysis will be described in the second part of the article, but for now it is necessary to focus directly on the consideration of each of the forces. At first glance, it may seem that no analysis in these areas can be done, but in fact the result may surprise you. With this approach, you can analyzethe activity of your enterprise and the competitiveness of its products in the market in order to make certain adjustments in the future that will allow you to increase some indicators in the long term. So, the Porter's 5 Forces will be discussed in detail next, an analysis example will also be given in detail, so that as a result you will know everything you need about this method.
Using a model
How to use Porter's 5 forces analysis in the real world? Example: Izbenka is a Russian chain of stores. The purpose of such an event is to determine the competition in a particular market segment, thanks to which it is possible to calculate how logical the introduction of a product will be, whether additional efforts will have to be made to achieve the desired result, and so on.
Thus, this model is used in the modern economy to compile a detailed competitive analysis of your company's products, as well as the selected market. Now you are sure that it is extremely necessary to apply Porter's 5 forces method. An example analysis of a bank or any other company can confirm this further, but for now it is necessary to concentrate on considering each individual force.
Invasion Threat of New Members
An analysis of Porter's 5 Forces using the example of a cafe can show in great detail what constitutes the first force, that is, the threat of invasion by new participants. So, there is a certain market in which there are already existing companies with their goods and services. New participants increase competition, that is, if new cafes appear on the market,fewer customers may begin to visit your establishment. How to assess the level of threat? Here Porter highlights several factors that influence the barrier to entry. If it is high, then the threat will be lower, since not everyone will want to overcome it.
What are these factors? First, economies of scale. If the volume of production in the market is large, then the cost per unit will be low, so it will be difficult for new entrants to achieve positive profitability. Secondly, this is product differentiation - the more goods or services available on the market, the more difficult it will be for a new participant to compete. Thirdly, it is the need for capital - the higher the initial investment threshold, the less likely it is that new participants will enter the market. Also noteworthy are the height of costs, access to distribution channels, and the government's production policy for a particular market. Naturally, the factors are not limited to this - there are additional threats that depend directly on the sales market and current conditions.
Buyers' Bargaining Power
If we talk about the second force, then it is important to understand that it is best to choose the market where the buyer has the least power and the weakest influence. Why? The reason is that customers are the consumers of your products and services, which is why the market exists due to them. Influential customers with a lot of power can directly influence your products by demanding higher quality by presenting theirrequirements and so on. So the less buyer power in the market, the better for you.
There are several conditions for the growth of buyers' influence: for example, the lack of uniqueness of goods (the buyer can choose any, and not just your product), high sensitivity to price (the buyer chooses not your product, but the cheapest option) and so on.
Supplier bargaining power
Supplier bargaining power is not as common as buyer power, but it can be powerful. The fact is that suppliers, in fact, are the owners of resources, without which the company cannot carry out its activities. And in some situations, suppliers get a much higher level of power - for example, when there are not too many of them on the market (or when there is a monopoly in the market), when the resources used to produce the goods are limited, and the costs of switching to alternative raw materials will too high. In such situations, suppliers have more power than usual, and they can directly influence the market environment, and with it, competition.
The appearance of substitute goods
Substitutes are those products that can offer a profitable alternative to your product. If there are high-quality analogues, your profit will be severely limited. A serious threat comes from those substitutes that offer a more attractive quality-price ratio. As long as the consumer can purchase lessquality product is cheaper, he will not buy yours.
Also posing a threat are substitute products from well-known brands that have already gained impressive popularity in other markets and are now planning to achieve the same result in the new one. You need to fight substitutes by creating your own strong brand, increasing product differentiation, eliminating standardization, and so on.
Intra-industry competition
And, of course, we should not forget that the competition in the market is most influenced by the participants there. The level of competition in the market will be high if there are a large number of participants with approximately the same volume of production, low product differentiation, high barriers to entry, and so on. High competition naturally reduces the profitability of the industry, so you need to pay special attention to this point.
Assessing the competitiveness of the product and the level of competition
Well, you already know everything about the forces that Michael Porter described in 1979, now you can safely analyze Porter's 5 forces using the example of a cafe, restaurant, shop or any other institution. But to improve the efficiency of the analysis, you should standardize it. This is what will be discussed further.
Now, an analysis example broken into four steps will be described in detail. The first of these is an assessment of the competitiveness of your product and the level of competition in a particular market. As part of this step, you need to evaluate the goods-substitutes that are present in the market, giving them a score of one to three, where one is the absence of substitute products, two is the presence in the market with a low market share, and three is the presence with a high market share. If you get one point, then the level of threat is low, if two - medium, and if three - high.
The next item is an analysis of intra-industry competition, one of the most important among Porter's 5 forces.
An example store analysis might look like this. There are four points in total: the number of participants in the market, the rate of market growth, the level of product differentiation, and the limitation on price increases. Naturally, each of these items also has its own criteria by which they can receive from one to three points. If we are talking about an ordinary store, then the level of market saturation will be high (3 points), as well as the growth rate of the market (1 point), the products of companies will be very different from each other (1 point), and the possibility of price increases will only be within covering costs (2 points). The result is 7 points, which gives an average level of intra-industry competition.
As for the entry of new entrants into the market, there are many more parameters: economies of scale, strong brands, product differentiation, as well as all the criteria that were described in the theoretical part. If we talk about a specific example of a store or cafe, then we can assume that only a few participants will have economies of scale (2 points), product differentiation will be average, and readinessparticipants to lower prices will be high, except for large representatives. The rest of the parameters will be at a high level, that is, they will receive three points.
As a result, we have a high level of threat of new players. Now you can already see from which side there is the biggest threat to your business.
Assessing the bargaining power of buyers
However, these are only three stages, and all 5 Porter forces must be taken into account. An example of analysis in banks will allow you to understand how to analyze the power of buyers. Here the result will be expressed in high, medium or low probability of losing customers. For the average bank, about half of its income comes from high-profile clients, while the other half comes from the rest (2 points). Also, two points are obtained when assessing the propensity of customers to switch to substitutes, since the services offered by the bank are only partially unique.
In addition, customers are highly price sensitive, meaning they will always try to switch to the offer that is more profitable. Also, customer dissatisfaction can be rated at two points. And in the end it turns out that the probability of losing customers is high.
Assessing the bargaining power of suppliers
This concludes Porter's analysis of 5 competitive forces. An example will talk about the latest force regarding suppliers. Here the assessment should be given on a two-point scale, not a three-point scale. An analysis of Porter's 5 forces using the example of a restaurant shows that withThe market is great for suppliers – there is a wide choice of options, there is no limit in the volume of raw materials, if it is necessary to switch to another supplier, the costs will not be too high, and for the supplier himself, this industry has a high priority. As a result, it turns out that suppliers have almost no influence on the market.
Summing up
We have studied Porter's 5 forces in detail. The enterprise analysis example ends with a summary. You need to analyze each of the five forces, determining whether it is high, medium or low for your company in a particular market, then describe in detail each of them and, if necessary, develop an area for improving the situation for you.
