Show The previous discussion analyzes the business and the overarching environment affecting the business. Now we turn our sights to understanding our business place in the industry. The most common and well-known tool for examining the business situation is Porters Five Forces (PFF), again introduced by Harvard Business Professor Michael Porter. The overall purpose of the PFF analysis is to allow you to use your knowledge to strengthen your position in the market. Particularly, it is useful in determining whether a new strategy, product, or business model will be successful in the relevant market. Back to: STRATEGY & PLANNING Back to: Entrepreneurship What is Porters Five Forces?PFF breaks down a given business position into five distinct forces. The forces are as follows:
Breaking Down the ForcesThe PFF analysis demonstrates the market power of the business with regard to this business force. The following diagram displays the interrelation of the forces. Here is a brief overview of each force. Supplier PowerSupplier power addresses the relative strength of suppliers in the industry. A supplier with more power has a greater ability to bargain for and capture value in the exchange of value between them and the customer (your business). That is, the higher the supplier power the more control they have over prices (ability to drive up costs). If your business is not capable of passing the costs along to customers, then it lowers your profit margin and your competitive position in the market. Dont think of the supplier analysis as examining a single supplier; rather, it involves the entire group of suppliers in the market. Supplier power is generally a product of the number of factors, including:
Buyer PowerBuyer power regards the ability of customers to control product prices in your market. The more power customer is able to grab more value in an exchange by either driving up costs or demanding higher levels of service or quality of product. Buyer power is important for both B2B (business-to-business) and B2C (business-to-customer) businesses. Here are some situations in which buyers possess greater power to control prices:
What is Competitive Rivalry?Competitive rivalry concerns the ability of your competitors to increase their market share. If you have numerous competitors or any competitors with superior value propositions (lower price, higher quality product, etc.) then your competitors have strong market power. Below are some common scenarios where competitors have high levels of market power:
The threat of substitutes or substitution regards the ability of other (non-industry) products or services to meet the wants or needs of your customer base. It also concerns the ability and motivation of customers to figure out a way to fulfill the need or want without your product or service. If this is possible, then it weakens your business market power by placing limits on the prices of your product or service.
What is the Threat of New Entry?This concerns the ability of new competitors to enter the market. As we discussed above, new competitors increase competition and ultimately push down prices. Further, new competitors will occupy some portion of the market, which may diminish your business existing market share. So, the ability of new competitors to enter the market easily indicates lower market power.
Related Topics
Was this article helpful? |