Porter’s Five Force Analysis - Know The Threats Before You Prioritize Requirements

Porter 5 force is a method of analyzing the business competition, contrary to the traditional SWOT (Strength, weakness, opportunity, threat) analysis which Michael. E Porter of Harvard University found to be lacking vigor and depth.

Figure: Porter’s Five Forces

Porter refers to these five forces as a microenvironment that affects the product's profit and the ability to serve its customers.

The Threat of New Entrants: This is one of the dangers that weaken a company's position or profitability. When the company has high profitability, it usually attracts new entrants into the industry. To stay ahead in the market, the company needs to have substantial barriers and an established position. When the prices are high, the entry prices become heightened, and exit becomes difficult.

Industry Rivalry: This is one of the significant cutthroats for the companies, where a potential rivalry can always pose a threat. Customers will have an option to consider when there are equally better competitors. Hence it is still essential for the company to analyze its competitors and look for ways to enhance and innovate its products. Lesser the less competition, the company has an advantage over fixing the pricing. Otherwise, they should be aware of the benefits and pricing value of their competitive rivalries.

The Threat of Substitutes: This is one of the unique threats where the customers use an alternative product as a substitute. This question comes in to picture when you ask what the customers will do in the absence of the product, or do they have an option to consider instead of using their product? (Eg: Rubbing alcohol can be dabbed with tissues and used as a substitute for disinfecting wipes, which poses a threat to disinfecting wipes. Another example is Coke/Pepsi, which can be used as a substitute in the absence of water).

Bargaining Power of Suppliers: Suppliers' power is also known as the input value. These suppliers can be anyone ranging from the supplier of raw materials, labor, or services, etc. When there are limited suppliers, the input value's price demanded by the supplier and the company has a lesser advantage as they have limited choices. When there are many suppliers in the market with the same materials/services, the company has a better price advantage since they can change the supplier to a low-cost one. The pricing is done based on competitive analysis.

Bargaining Power of Customers: Like suppliers' power, customers have higher advantages and control when they have several competitor companies' choices. They tend to bargain the benefit of promotions, offers, and price values before purchasing a product. On the other hand, when the company has very few or no competitors or rivalries, the customers are left with limited or no choice. The company can control customers' power by engaging them in loyalty programs, increased switching costs, direct marketing with customer value programs, etc.

Understanding and applying Porter's five forces theory can enable the company to understand the market and its customers better and adjust its business strategy to enhance its value and profits.

References:

Wikipedia contributors. (2020, September 27). Porter's five forces analysis. Wikipedia. https://en.wikipedia.org/wiki/Porter%27s_five_forces_analysis#Threat_of_new_entrants

#Porter039sfiveforces #ProductManagement #ProductStrategy #ManagementTheories #ProductDevelopment