Use Porter's Five Forces for Competitive Analysis

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@paul-boag


Business Benefits

Stay ahead of competitors by being aware of the external forces that influence your marketing success.


Find at least two state-of-the-industry or economical reports for the current year, and take notes in a document, spreadsheet, or any other format that will allow you to access the information quickly.

Take notes on: local or global demand for your products, employment and productivity trends, supply chains, investments, fiscal contributions, and overall industry performance.

Consult legislative websites to check for legislation changes and legal initiatives that could impact your activity, especially if you operate in a highly regulated industry, such as fintech, life science, or oil and gas.

If you have doubts about new legislation and its effects on your industry, get more details from the legal department or an independent consultant.

Go through industry-related publications to find interviews, analysis, and news about launches, mergers, acquisitions, pilot projects involving new technology, and social or political issues that can influence your business.

Social issues can include climate change and carbon footprint, gender equality, discrimination, or raising concern over crime and terrorism. Political issues can include trade wars, changes in the tax laws, consumer protection regulation, data protection debates, trade unions, or coming elections.

Create a table with five columns based on Porter’s Five Forces. Add headers for Buyer Power, Supplier Power, Substitutes, Threat of New Entrants, and Competitive Rivalry.

Write in the Buyer Power column an estimated number of potential buyers for your product, the average client acquisition cost, the average volumes of your buyers’ purchase, and how much each of your current clients accounts for from your total revenue.

The Sales department and your notes will provide the information necessary to determine how buyers influence your business decisions.

  • Low buyer power: You can reach multiple buyers with low costs, and your revenue doesn’t depend on one or two major clients.
  • High buyer power: Switching clients come with major costs for your business, and your revenues depend on one or two clients.

Write in the Supplier Power column how many suppliers are in the market, how much it costs you to change a supplier to get a better price, and how any changes influence your products’ quality.

The Acquisition and Engineering departments can provide data about suppliers and their impact on its product development efforts.

  • Low supplier power: You can choose from multiple suppliers to get better prices without rethinking fundamental business processes.
  • High supplier power: Changing a supplier means you’ll have to make a massive investment in hardware or employee training, or it has a significant impact on your product’s quality.

Write in the Substitutes column the problems your product or service solves, and what cheaper or innovative solutions can solve the same issues. Estimate how much your current clients pay to switch to a new product or service, and whether the change influences revenue outlook.

Don’t focus on direct competitors at this point. If you run a hotel, for example, Airbnb is a substitute that could threaten your business. Substitutes have high power over your business when your clients have cheaper alternatives they can implement quickly, and still get similar results as if they used your product.

Write in the Threat of New Entrants column the obstacles that a new business would encounter if it entered the market at the moment of your analysis.

Barriers to entry can be capital requirements, rigid regulations, unpredictable government policies, a complex supply chain, or even the buyers’ reluctance to try new products or services. The harder it is for new businesses to enter the market, the lower the threat of new entrants for your business.

Add profit margin, direct competitors, and rival products to the Competitive Rivalry column. Identify the advantages and drawbacks of each competitor.

Include local and global companies, startups, and established businesses, when listing the leading players on the market

  • Low rivalry: A small number of competitors, low exit barriers for unprofitable businesses, no price wars.
  • High rivalry: Many competitors with similar financial power and reputation, high exit barriers, and competitors who can support price wars and aggressive advertising.

Analyze notes and findings, and draw conclusions on how your organization fits into the sector at large. Use findings and conclusions to align positioning and strategy.

Depending on where you present the analysis, you can illustrate your findings in a diagram as well.