Porter’s Five Force Analysis — Know The Threats Before You Prioritize Requirements

Porter's Five Forces is a method for analyzing business competition. It is an alternative to the SWOT analysis, which was lacking in depth.

Porter refers to these five forces as a microenvironment that affects the product’s profit and the ability to serve its customers.

The Threat of New Entrants: This danger weakens a company’s position or profitability. When a company is highly profitable, it usually attracts new entrants into the industry. The company must have substantial barriers and an established position to stay ahead. When the prices are high, entry prices become heightened, and exit becomes difficult.

Industry Rivalry: This is one of the significant cutthroats for companies, where a potential rivalry can always pose a threat. Customers will have an option to consider when there are equally better competitors. Hence, it is still essential for the company to analyze its competitors and look for ways to enhance and innovate its products. With less competition, the company has an advantage over fixing the pricing. Otherwise, they should know their competitive rivals' benefits and pricing value.

The Threat of Substitutes: This is a unique threat when customers use an alternative product as a substitute. This question comes into the picture when you ask what the customers will do without the product, or do they have an option to consider instead of using their product? (For example, Alcohol can be dabbed with tissues and used as a substitute for disinfecting wipes, which poses a threat to disinfecting wipes. Another example is Coke/Pepsi, which can be used as a substitute without water).

Bargaining Power of Suppliers: Suppliers’ power is also known as the input value. These suppliers can be anyone, including raw materials, labor, services, etc. When there are limited suppliers, the input value’s price is demanded by the supplier, and the company has a lesser advantage as they have limited choices. When many suppliers in the market have the same materials/services, the company has a better price advantage since they can change the supplier to a low-cost one. The pricing is done based on competitive analysis.

Bargaining Power of Customers: Like suppliers, customers have higher advantages and control when they have several competitor companies’ choices. They tend to bargain the benefits of promotions, offers, and price values before purchasing a product. On the other hand, when the company has few or no competitors or rivalries, the customers are left with limited or no choice. The company can control customers’ power by engaging them in loyalty programs, increasing switching costs, and directly marketing with customer value programs.

Understanding and applying Porter’s five forces theory can help a company better understand the market and its customers and adjust its business strategy to enhance its value and profits.

References:

Wikipedia contributors. (2020, September 27). Porter’s five forces analysis. Wikipedia. https://en.wikipedia.org/wiki/Porter%27s_five_forces_analysis#Threat_of_new_entrants

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