Learn about Porter's 5 Forces model, a method for analyzing market attractiveness

Key information:

• One of the methods used to analyze the market is Porter's 5 forces.
• Porter's 5 forces analysis is used to assess the attractiveness of a sector and is based on 5 different factors, related to the company's environment.
• Porter's 5 forces are worth applying when considering whether to enter a particular market.
• The 5 forces under analysis in Porter's method are: bargaining power of suppliers, bargaining power of buyers, intensity of competitive struggle within the sector, threat of new producers, threat of substitutes.
• A proper analysis should begin by defining the sector in which the company is to operate.
• Once the sector is defined, its size and dynamics must be determined.
• After taking a close look at the sector, pay attention to each of the 5 forces, assign to each a few factors that have a significant impact on that part of the market, and then evaluate these factors in terms of their impact on the company's environment.
• After analyzing all the forces, an overall assessment of the sector's attractiveness can be made.
• In practice, Porter's 5 forces analysis is often expanded to include other methods, such as SWOT analysis, or the PEST method.

Details below!

Many businesses, especially young and innovative ones, make decisions about their operations based on their experience or their own hunches. They often rely on intuition, not basing their choices on any „hard” numbers and analyses. One can justify this by a lack of funds for market research, but it's worth considering whether the costs associated with a wrong decision won't be greater than the expenses for Market research and analysis. Isn't it more advantageous to spend more money and time now, rather than „shutting down operations” later due to wrong decisions?

In addition, using the right methods and concepts, it is possible to carry out market analysis under "home" conditions, without the need to engage specialized companies and incur large financial expenses. One of the methods used to analyze the market is Porter's 5 forces. The article explains how, using this tool, to carry out an assessment of the sector's attractiveness on your own.

What is Porter's 5 forces analysis?

As the name suggests, Porter's 5 forces concept was developed by Michael E. Porter. He is a well-known economist, researcher, author of many specialized books, consultant, lecturer and teacher. He has taught at Harvard Business School and has developed many theories and concepts of strategy, dealing with problems related to businesses, the economy and society, including market competition and corporate strategy, economic development, the environment and health care.

When to apply Porter's 5 forces analysis?

Porter's Five Forces is worth applying when considering whether enter a given market. This method is used to assess the attractiveness of a sector and is based on 5 different factors related to the environment in which the company operates, namely:

• Bargaining power of suppliers,
• The bargaining power of buyers,
• The intensity of the competitive struggle within the sector,
• The threat of new manufacturers,
• The threat of substitutes.

Porter's 5 forces - an example

To better illustrate Porter's Five Forces method, it will be presented using the example of a company in electronics industry, which produces personal computers.

Where to start with Porter's 5 forces analysis? - Assess the attractiveness of the sector

Proper analysis start by defining the sector in which the company is to operate. As a reminder, sector is a narrower concept than industry, and how narrowly you want to define it is up to you. Using the example of an electronics company, a sector can be either "the computer market" or "the market for computers and mobile devices." Later sections of the article use the second option.

Sector size

After defining the sector, its size should be determined. It is most often defined as the sum of the annual turnover of all companies in the sector operating in a given market. Determining exact data is very difficult in practice; we won't be calling everyone. potential competitor with a question about income this year, especially if we are conducting the analysis using the DIY (Do It Yourself) method. A lot of information on this topic can be found on the Internet, or you can think about it yourself. It is obvious, after all, that since leading laptop manufacturers are global companies, they achieve „large” incomes, which is why we will simply define the size of the sector as „large.”.

Sector dynamics

Next, you should consider the sector's dynamics. Are manufacturers fiercely competing to create ever newer technologies and models of portable computers? No, most generations of this type of hardware are similar to each other. There are innovations, although such as new software, screen types, sound cards, etc. However, they are not a „revolution” in any way, so I think describing the laptop sector's dynamics as „average” would be appropriate. To conclude the sector description, one should consider its life phase. The sector's life cycle resembles both the product and enterprise life cycles and is modeled on the aging of a human. It consists of the following phases:

• introduction,
• Development,
• maturity,
• decline.

It can be said that the market for portable computers is mature. As we established earlier, there is no fierce technological competition here, and the laptops themselves are in common use.

How to conduct a proper analysis of Porter's 5 forces?

After a thorough examination of the sector, attention should be paid to each of the 5 forces. After identifying all elements of the analysis, we assign a few factors that have a significant impact on the given part of the market to each one individually. Then, these factors should be assessed in terms of their impact on business environment.

Rivalry within the sector

Let's start with Competition and current rivalry. First, you should identify the main players in the sector and their market shares. This information can often be found online. In the analyzed market, the largest players are:

• Hewlett-Packard (24.1% market share),
• Lenovo (22.2%),
• Samsung (15.6%),
• Acer (12.6%),
• Asus (8%),
• Apple (7.1%),
• Panasonic (3.1%),
• Dell (2.5%),
• Toshiba (2.5%),
• Sony (1.9%).

Then, the level of rivalry between sector participants should be established, which is what the competition analysis. In the case of the mobile computer market, it will be average. Marketing activities of individual companies are noticeable, but they are not very intrusive, and manufacturers "do not plant pigs" on each other. It is also worth considering the form that competition takes. An open price battle is definitely out - the prices of laptops are similar and no one pays attention to the low price in advertising. Promotion and comparative advertising is also unlikely to fit here. You can see promotion and advertising of your own strengths, so this will answer the question of the form of competition.

Threat of new competitors

The next force is the threat of new entrants. Let's consider this aspect. All laptop market leaders are global companies with enormous budgets and cutting-edge technological infrastructure., conducting marketing activities on a large scale. Local companies practically do not exist in this sector. Therefore, a potential new laptop manufacturer would have to have a very large initial capital and be a „born global” company, meaning it would conduct its operations on the global market from the very beginning. Additionally, leading mobile computer manufacturers enjoy a strong reputation, so a new type of this equipment offered by a new enterprise should actually stand out with something groundbreaking. Therefore, the threat of new players entering the sector can be classified as „low.”.

The threat of substitutes

The next force we will analyze concerns substitutes. These are all products that satisfy the same need as the products that the analyzed company produces. If we assume that we want to operate in the "mobile devices and computers" market, then in this respect, portable computers, in addition to classic computer functions such as:

• network access,
• Access to multimedia (music, photos, videos, etc.),
• games,
• job opportunities,
• contact with other people,

Are devices that can be moved. So let's consider what other devices meet these criteria and what is the level of threat from them. First of all, tablets, their threat level can be described as medium, they are handier than laptops, but less comfortable to work on. Another substitute is smartphones. However, they pose little threat, as they do not have as many options as portable computers, are smaller, have less memory, etc. Overall, the threat from substitutes is low, as laptops have the greatest convenience of use and the highest number of additional features.

Bargaining power of suppliers and buyers

Before us are the last two forces - suppliers and buyers. I will describe them together, since their analysis proceeds in the same way. First consider those groups and organizations to which the analyzed company pays to provide a product or service. When analyzing the attractiveness of a sector on its own, only the most important suppliers will suffice. In the case of laptop manufacturing, these include parts manufacturers, laboratories and laptop transport companies. Next, it is necessary to determine their power of influence on the company. In other words, how strongly our various suppliers "dictate terms" to us. This can be done using a scale from 0 to 5.

In our case, it will mostly be 0 to 2. The same procedure should be followed with buyers. However, let's remember that a buyer isn't necessarily just „John Doe” who will be using our product. Buyers are also distribution channels So, in this case, electronics stores, corporations, and sometimes state institutions. Here, too, one should determine the bargaining power of buyers on the analyzed company. For individual customers, it will be high – they are ultimately the target audience for the product. Electronics stores have a slightly lesser impact on us. As for the other types, they constitute a small fraction of all buyers, so their bargaining power is low.

Recommendations

After analyzing all the forces, an overall assessment of the sector's attractiveness can be made. For the mobile computer market, the "diagnosis" will be as follows:

The laptop market is mature, and companies currently operating in it enjoy significant revenues. Laptop manufacturers do not compete particularly fiercely with each other. Competition primarily takes the form of promotions and advertising of their own strengths. The threat from substitutes is small, and companies enjoy considerable independence from suppliers. This positive picture is spoiled, however, by the fact that entering this market requires significant huge financial outlays, both to produce on a global scale and for marketing activities that would encompass the entire world.

The analysis conducted in this article gives a good approximation of how to use Porter's 5 forces concept.

In practice, Porter's 5 forces analysis is often expanded to include other methods, such as SWOT analysis, or PEST method. You can also use scoring the attractiveness of the sector. In order to make market research as accurate and detailed as possible, it is a good idea to use the services of a professional consulting firm. The costs incurred in working with specialists will more than pay off, as the organization will be able to make more accurate decisions to ensure success and growth, based on facts and proven data.