Using the Porter’s Five Forces Framework for Industry Analysis
The Porter’s Five Forces framework was created by Harvard Business School’s Michael E. Porter in 1979, as a response to the popular SWOT analysis. The framework is widely used to analyse an industry and when planning corporate strategy. It can also be used to help companies manage their resources better, and get better investments. When there is a change in any of the five forces, the firm will be required to reassess itself and adapt to the new market information.
Porter realised the competition that the firms face are typically dependent on five forces: Potential Entrants, Suppliers, Substitutes, Buyers and Industry. Using evidence and facts, the framework also rates the strength of each of these five basic forces: low, moderate and high.
Read on to understand the Porter’s Five Forces, with popular American coffee chain Starbucks as an example.
1. Potential Entrants
This shows how easy or difficult it is for competing firms to enter the market. It is determined by the barriers of entry such as high-cost requirements, access to supplies or even having a strong branding. The harder it is for competitors to enter the market, the more market power an existing firm has. This will allow them to set higher prices and bargain for lower costs with their suppliers.
Potential entrant of new competitors to Starbucks
The barriers to entry into the coffeehouse chain industry is not very high, as the initial capital and investments required are low. For the users, switching to new coffee brands is not difficult as well, especially if they offer lower prices. However, Starbucks has a very strong branding, which enables it to retain a good amount of its market share.
2. Suppliers
The power that suppliers have to determine the price of the product, and the quality of your final product. This is driven by factors like the uniqueness of the product, the cost of switching from one supplier to another, and the size and strength of the supplier. When there are lots of suppliers in the market, the power that each of them have will be lower as there is greater competition among them.
Starbucks’ suppliers
Starbucks’ large market size and strong branding gives it a competitive edge in when accessing raw materials and suppliers. The coffee giant does not incur high costs when switching to another supplier, due to the abundant supply of coffee farmers and suppliers.
3. Substitutes
The threat of customers substituting to other products or services. Where close substitute products exist in a market, the likelihood for customers to switch to substitutes increases. This is dependent on various factors:
Product Differentiation
The marketing and branding process of creating a product or service that is different from the rest of the market.
Competitors’ Profits
This involves knowing the prices and costs of the competitors. The higher the profit margin that competitors have, the greater their ability to decrease their prices. This could lead to your company being pushed out of the market if competitors decided to reduce prices such that you are unable to generate significant profits.
Substitutes for Starbucks
There are many substitutes for Starbucks out there in the market, be it different coffee brands, or different types of drinks. There are also many providers of drinks, from bars to restaurants. On the flip side, branding has been a pivotal strategy of Starbucks over the years, and is known throughout the world.
4. Buyers
The power that buyers have to bring down the prices of the products or services. If a business depends on a small consumer base, the buyers have greater power to dictate prices.
Starbucks’ customers
With internet now available to most of us, buyers are more well informed about the choices that they have. Globalisation has also led to the availability of an abundance of coffee brands in the market. Starbucks customers are also able to switch brands at little to no cost.
5. Industry
The number of firms in the industry determines how competitive the whole market is. It also includes knowing the strategies that your competitors are going to make so you will be able to better plan your reaction to any of those changes.
The coffee industry
There is a high level of saturation in the market that Starbucks operates in. Each of Starbucks’ competitors are also working hard to innovate and come up with new ways to attract and retain their customers. However, Starbucks has managed to retain 40% of the market shares in the US.
Acting on the Porter’s Five Forces Analysis
After knowing these forces in the market, it is then on the firm to decide how best they are able to defend themselves against these threats or turn them to their favour. They are able to focus on each individual force to specifically mitigate the strength of each force. For example, if the market has a high number of potential entrants, the firm can explore ways which they can increase the barriers by developing cost advantages or achieve economies of scale.
For companies that have products in more than one industry, it is highly recommended to have a Porter’s Five Forces framework on their primary and main industries.
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