Porter's Five Forces of Competitive Threats within an Industry

If your industry's competitive landscape were a chessboard, the Porter's 5 Forces Model would be how you size up your opponents relative to yourself. Being able to measure the intensity of competitive risk, relative to your internal strengths and weaknesses will help you to plan strategically. In short, the Porter's 5 Forces Model is a tool for developing your corporate strategy.

Uses & Benefits

• to help in creating items for a SWOT analysis.
• to determine whether you want to enter into an industry
• to continually evaluate the intensity level of competition in their current industry
• to adjust and then justify strategic decisions in presentations
• business plan 
• corporate strategy risk management plan
• annual reports

Using Porter's 5 Forces involves systematically answering 5 set of questions about the industry. It can therefore be converted into an internal survey requiring managers to rank each item, optionally on a Likert interval scale like 1 - low, 2 - medium and 3 - high. The lower the overall risk, the better the chance of dominance within an industry. I can not stress enough how important it is to customize your responses according to your particular business. Even businesses within a single industry can likely have very different outcomes because of their unique brand positioning strategy.

0. List industry leaders and other key competitors. 

Is the market concentrated? (ie do the top 4 players account for at least 80% of all industry sales?) Do your competitors compete on the basis of differentiation thereby asking premium prices? What is customers' perception of quality among your competitors?

1. The threat of new entrants.

Are you in or thinking of entering into an industry and wonder what type of competitive threats you will or can potentially face? These questions focus on how difficult it is to enter the industry, ie 'entry barriers'.

• Entry barriers
• Scale economies. If current players already enjoy scale economies, they are likely to have a considerable cost advantage over new entrants who can not achieve these scale economies.
• Relative Differentiation. What is your and or competitor's level of differentiation? The higher the differentiation, the harder it is for others to compete directly. For instance, if you have highly innovative products, they will be harder to immitate and therefore give you relatively low levels of risks. Equally, if your competitor is the one with highly differentiated products, your competitive risk is high.
• Customers' switching costs. How easily can customers switch between you and your competitor? The concept of 'costs' should not be perceived only in terms of product price. Instead, consider switching costs from the customer perspective regarding how customers perceive value and costs. For instance, common ways in which businesses raise switching costs include legally binding purchase contracts; emotionally binding loyalty rewards programs that motivate FOMO; superior benefits like convenient distribution channels or hassle free guarantees with more accessible and empowered customer support.
• Entry costs. Do new entrants need to hire research and development teams, gain specialty competencies, buy factory space and so on?
• PESTLE factors. Do you and or your compeititors face restrictions and or permissions that make entry relatively harder? Examples include trade agreements, Customs regulations, embargos and so on.

If you wish to enter into a market with very large and intimidating players, avoid trying to compete in attack against them. This is too costly and futile. Your best approach will be to enter the market within a specialized niche.

2. Bargaining Power of Suppliers. Are you in a buyer's or seller's market for your supplies? Specifically, if you have multiple options for your necessary supplies, you have more power. However, the converse is true. The ideal is to have multiple suppliers. Afterall, if one supplier raises prices, your business has low switching cost, perhaps you are not contractually bound.

Case study: 

While otherwise very strong in its industry, Tesla faced 'high' risk in this area because they depended on their suppliers because they had only one supplier for the majority their components. Ironically, this might have occurred because of their highly differentiated product which gives them relatively low risk regarding differentiation. 

3. Bargaining Power of Buyers. As in the previous point, the lower the relative bargaining power of buyers to switch to competitors, the lower your risk. 

Case study:

Interestingly, while Tesla faced 'high' risk as a buyer with its suppliers, its sheer contribution to those suppliers is so considerable that they are not that badly off overall because they also have relatively low risk as a significant customer, possibly the largest of that supplier. However, if this question were being analyzed from the perspective of those suppliers, they would suffer high risk of Tesla's relatively high bargaining power. 

4. Threat of Substitution. Are there alternatives to your product? Such alternatives need not only be precisely the same. However, they should be considered. For instance, a movie theater should not only consider other movie theaters as substitutes. Since their customers are ultimately buying entertainment, the substitutes can range from video games, parks, board games and so on. 

5. Rivalry among Competitors. This final question should consider all of the previous ones. To answer this question, consider signals of rivalry like price discounting. 

 

CONTENT RELATED TO PORTER'S 5 FORCES OF COMPETITIVE THREAT

• Business plan
• Corporate strategy
1. Porter's 5 Forces
1. Create SWOT analysis (using Porter's 5 Forces). Create subsections that address each unique product at a time.
2. Ansoff Matrix
3. Boston Matrix
• Risk management 101
• Abovementioned case studies in other content
• Tesla