HOW TO ANALYSE ANY BUSINESS BEFORE VENTURING (PORTER 5 ANALYSIS)

Porter’s Five Forces is a model that identifies and analyzes five competitive forces that shape every industry and helps determine an industry’s weaknesses and strengths.

Five Forces analysis is frequently used to identify an industry’s structure to determine corporate strategy.

Porter’s Five Forces of Competitive Position Analysis were developed in 1979 by Michael E Porter of Harvard Business School as a simple framework for assessing and evaluating the competitive strength and position of a business organisation.

This theory is based on the concept that there are five forces that determine the competitive intensity and attractiveness of a market.

Porter’s five forces help to identify where power lies in a business situation. This is useful both in understanding the strength of an organisation’s current competitive position, and the strength of a position that an organisation may look to move into.

The five forces are:

1. Supplier power. An assessment of how easy it is for suppliers to drive up prices. This is driven by the: number of suppliers of each essential input; uniqueness of their product or service; relative size and strength of the supplier; and cost of switching from one supplier to another.

Helpful Questions:

How many suppliers of the product or service you use are there?

What is the cost of switching?

Is what they supply unique or special?

How big a customer are you to your supplier?

2. Buyer power. An assessment of how easy it is for buyers to drive prices down. This is driven by the: number of buyers in the market; importance of each individual buyer to the organisation; and cost to the buyer of switching from one supplier to another. If a business has just a few powerful buyers, they are often able to dictate terms.

Ideally be equipped with the following information:

Sales and performance of competitors

Any information on reasons behind customer churn
Intelligence on why you have acquired or won certain clients

Detail on what suppliers you use to provide the product/service

An understanding of who your clients are and what is impacting them

3. Competitive rivalry. The main driver is the number and capability of competitors in the market. Many competitors, offering undifferentiated products and services, will reduce market attractiveness.

Helpful Questions:

Are there already substitute products or services?

Is the cost for a customer to switch low?

What is the brand loyalty and strength like in the marketplace?

How does the product or service compete?

4. Threat of substitution. Where close substitute products exist in a market, it increases the likelihood of customers switching to alternatives in response to price increases. This reduces both the power of suppliers and the attractiveness of the market.

Helpful Questions:

How many alternative options are there in the market for customers?

What would the cost of switching be?

How long are your contracts on average?

Are customers well educated about the product?

Are they price sensitive?

How much of your product or service do customers purchase?

5. Threat of new entry. Profitable markets attract new entrants, which erodes profitability. Unless incumbents have strong and durable barriers to entry, for example, patents, economies of scale, capital requirements or government policies, then profitability will decline to a competitive rate.

Helpful Questions:

Is there regulation in the market?

How complicated is the product or service?

Are there legal barriers?

What budget would be required?

What would the existing players response be?

What are the barriers to entry?

Have new players arrived recently?

If so, how did they do?

These are the questions one should ask himself or herself before starting out or venturing into any business in any location at all

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