Porter's 5 Forces Model

Written by: Sarah Johnson

Michael Porter is a pretty cool guy. He developed theories on economics and business strategy that are still used today all over the world. One of the most famous of his theories is the Five Forces Model.

If you’re thinking about jumping into a new market - or better understanding the one you’re already in - this model is a must. It helps determine the pros and cons of the industry, also known as industry attractiveness. In the race for market domination, the winners are those that pay attention to these 5 crucial factors: 

 1. Threat of Competition 

 How many cars are in the race? This force looks at the range of competitors in the market and how they might effect your brand. If competition is too high, the attractiveness of the industry falls and the less competitors there are, the more likely it is you’ll nab a few trophies for your shelf.

2. Threat of New Entrants 

 How easily can a driver join in the race? Do they need an expensive engine? Months of training? Or can they simply fire up their old station wagon and cruise past you? If a new company can enter the market with limited time, money, or resources, your little car is more likely to get lost in the industry herd. 

3. Power of Suppliers 

Are drivers only buying Lambo’s? Or is the racetrack a plethora of different makes? If there are only a few suppliers for the market, they have more control over the companies in it. They can drive up their prices because their customers have nowhere else to go. High supplier power makes for a less attractive market.

4. Power of Buyers 

 How many fans are coming to the race? The less people there are buying tickets, the more power they have over ticket price or food and drink costs. This force also looks at the significance of each buyer and how easy it is for them to buy tickets to a different race. If a customer base is narrow, they have more influence over how the market operates. 

5. Threat of Substitute 

Products Are horse races just as fun with cheaper drinks? How many other competitive events are easily accessible to your fans? If products outside the industry are easily substitutable for products inside the industry, keeping customers gets tougher and market attractiveness gets lower. You want your fans to be entertained by (and spend money on) your race only.

Deciphering whether these factors of your chosen industry are high or low is critical. You need to know what you’re getting into before the race. Will entering be profitable? If the answer is no, it might be time to reconfigure your firm strategy. And if the answer is yes, you might be in for one hell of a ride.