Understand your market by doing Porter’s Five Forces analysis!
Understanding your own market, being aware of the attractiveness and possible profit that can be made on it is essential for the success of a good business.
With Porter’s five forces analysis tool, doing this study becomes a much simpler and more systematic habit.
But do you know how to do Porter’s five forces analysis? In this post, we present an overview of this tool for strategic planning and some tips on how to use it.
Porter’s Five Forces Analysis Example
Several market experts use this analysis to assist in the creation of the strategic planning of a company, which guides the way she wants to go until she reaches the peak of her success.
But how to use this tool, without understanding what these 5 forces are, for example, or even how to apply them to market analysis of your business? That is what we will study now.
What are Porter’s 5 Forces?
It is a tool created by Michael Porter, in the 70s, with the objective of evaluating and analyzing the external environment in which an organization operates.
An example of Porter’s Five Forces Analysis, in this case: If you have a software company, Porter’s analysis helps you investigate whether your software is at the level of your competitors, as well as probing how competitive this market is.
Its goal, therefore, is to measure market competitiveness and to indicate if your business is involved in it or not. This gives you a broader view of your competition and helps you learn how to develop your own business better.
But what is market competitiveness?
The concept of competitiveness used in this tool aims to come up with answers to questions like:
- Is the market your business is in profitable?
- Is it worth investing in?
- If so, how can you be better than the competition?
To answer these questions, Porter explains that there are 5 external forces that influence your business that can make it less profitable.
In advance, we can guarantee: the greater the forces analyzed, the greater the chances of the market being profitable.
Learn about each of Porter’s Forces:
1- Rivalry between competitors
The rivalry between companies in the same market is a crucial point to analyze. You therefore need to know exactly who your direct competitors are, as well as track their strategies and development.
Studying your competitors is paramount and must be done regularly. Ask yourself what strategies they are using.
From them, find out how to stand out in the market you’re competing in. Analyze the advantages they have, try to know your target audience, their tactics and flaws.
2- Bargaining power of suppliers
You need to keep in mind what impact your suppliers have on your product and therefore on the development of your business.
Do they have you in the palm of their hand? To reach a conclusion, think about how many suppliers you have. If only a few, try to broaden this relationship by comparing prices, lead times and quality.
And most importantly: don’t depend on just one or the other! Remember that your suppliers are not necessarily unique to your company. They can, and probably are, supplying your competitors as well.
3- Threat of substitute products
The third point in the analysis of Porter’s 5 forces concerns substitute products.
If you already have a product or service, you know that it meets a specific need or solves a problem. But as innovative as your product is, it does not mean that you will be free from competition.
Therefore, list competitors who have products similar to or equal to yours and invest based on that analysis. What does your product have or might have different that will make people think twice before choosing yours?
4- Threat of entry of new competitors
What can you and your existing market competition do to block – or at least hinder – the entry of new competitors?
This is not a question that often comes to the mind of entrepreneurs. But by preventing this threat, you will at least have less headaches! Factors that often block new market adventurers are well-established brands, patents and exclusive contracts.
5- Bargaining power of customers
What is the power of customers in relation to your product? Consumer decision power is very strong, especially in relation to the price and quality offered by the product. In fact, there is no way to do a good Porter’s five forces analysis without looking at this aspect.
The maxim “the customer is always right” is not at all wrong when we think of the power the customer has to demand lower prices or better products. In the end, who defines the value your product or service has is your consumers (or lack thereof).
Therefore, the higher the level of competition in the market in which your product is inserted, the greater the consumers’ control over your sales.
For example, if few companies offer the service they are looking for, control is focused on suppliers. But when the average ticket – the average amount each customer spends on their purchases at an establishment – is high, this makes the company and the customer have a more balanced, dependent relationship.
To find out how much power your customers have over you, ask yourself a few questions:
- What is the ratio of buyers to companies that provide the same or similar product as mine?
- What is the power of these customers to dictate the terms of my business?
- How does my customers’ average ticket influence the buying process?
- Is my clientele active on social networks, either to make complaints or to help my brand credibility?
How important is the Porter’s analysis for organizations?
Porter’s five forces analysis is one of the business management tools which applies to any business regardless of its size. Its conclusions are important to show the position of an organization in the market, visualizing positive and negative points, as well as strengths and weaknesses of the company itself and the competition.
Using this analysis enables staff to gain a deeper understanding of their services, customers and competitors.
Thus, the organizational strategy can be developed in a much more planned and intelligent way.
To have a successful business, it is not enough to just have a great idea: you always have to keep an eye around you, probing what others do differently and innovatively. So you can learn from them and find out how to always be one step ahead.
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