Five Forces Analysis: The Ultimate Guide to Understanding Porter’s Five Forces
When you're investing in stocks or bonds, you always need to understand the amount of competition in the industry you're interested in faces. The intensity of competition can depend on the industry. If you're running a business, you need to understand the level of competition to create an effective strategy.
You need a way to analyze the competition to see how many challenges your company faces to make sales. This can help you realistically project revenue growth of new or existing products or services. It can also help you in a variety of ways.
It can be difficult to measure competition in your industry, and you might struggle for a way to successfully analyze it. Porter's Five Forces model is a reliable and common method. This guide can help you understand Porter's Five Forces model and help you utilize it for your business or to make investments.
What is the Porter's Five Forces model?
Porter's Five Forces model is a way of determining the competitive environment in which a business is a part. The method uses industrial organization economics to look at five forces that calculate the intensity of competition within a company's industry.
You can use this information to determine the potential profitability of a company. The five forces used in the model include:
- The number of competitors currently within the industry.
- The likelihood and potential of new companies entering the industry.
- The amount of power held by suppliers.
- The amount of power held by customers.
- The potential threat of similar or substitute products.
These five forces can make your company more or less profitable depending on its numbers. For example, if there is a large number of competitors within a specific industry, it's harder to make money and realize revenue growth. However, the number of competitors isn't the only factor affecting this model.
You need to look at the complete analysis of Porter's Five Forces model for your industry in order to understand your potential better.
Analysis of the Porter's Five Forces model
With an overview of the five forces, it's time to look at how to analyze each one.
Number of competitors within an industry
When there are many competitors offering similar products or services, the company loses the power to charge as much as they like. They must offer competitive pricing to compete for business. However, an industry with very little competition is much more profitable.
New companies entering the industry
A company loses power if it's easy for new businesses to enter the industry and start competing. The easiness is usually defined by the startup costs of opening a new company within a specific market and start selling products or services.
The amount of power held by a supplier
If it's easy for a business to find a new supplier, the pricing of supplies becomes competitive and makes it easier to garner a larger profit. However, some industries have limited suppliers, making it harder for a business to have power over the supplier.
The amount of power held by customers
Are there a limited number of companies selling a specific product? If there is, the customers don't hold much power. The companies can sell their products at a higher price point, and customers have no choice but to pay or go without.
Similar products and substitutes
The uniqueness of your products and services plays a role in the power you hold in the market. When customers can't find a similar or substitute product, they're willing to pay more for it.
Porter's Five Forces method is an excellent way to determine the effects of various forces within an industry on a specific company. With MindManager software, we can help you create a visual representation of these forces within your industry to help you better understand the power you hold.