Porter’s Five Forces Model

Welcome back guys,

Today let’s talk about one tool that very important when you want to start your business and also when you have run your business, is called porter’s five forces model. By using five forces model, you can know what kind of environment that your company stands in and also how attractive the industry.  This tool developed by Michael E. Porter, one of the Bishop William Lawrence University Professor at The Institute for Strategy and Competitiveness based at the Harvard Business School. He create the tool for industry analyzing with five component that are involved in company’s environment are the risk of new competitors entering the industry, threat of potential substitutes, the bargaining power of buyers, the bargaining powers of suppliers, and the current competition in the industry.

Porter’s Five Forces Model

Threat of New Entrants

Threat of new entrants is the ease with which new competitor s can enter the market if they see that you are making good profits (and then drive your prices down). In this component, you must consider about the time and cost of entry, specialist knowledge, economies of scale, cost advantages, technology protection, and barriers to entry. When the barrier entry is low, the threat of new entrants will be high. It makes the industry is not attractive.

Threat of Substitutes

Threat of substitutes is defined as the extent to which different products and services can be used in place of your own. The items that you must focus in this component are substitute performance and cost of change. If there are many products in the market can substitute our product, it will make the industry not attractive.

Buyer Power

The meaning of buyer power is the power of your customers to drive down your prices. You must consider the number of customers, size of each order, differences between competitors, price sensitivity, ability to substitute, and cost of changing. When there is only one customer for our product, it will make our business depend highly with the customer. So, the industry is not attractive.

Supplier Power

Supplier power is the power of suppliers to drive up the prices of your inputs. There are several things that you must consider in this component, which are: number of suppliers, size of suppliers, uniqueness of service, your ability to substitute, and cost of changing. If your supplier is only one, you have high dependency to your supplier. It makes the industry is not attractive.

Competitive Rivalry

The definition of competitive rivalry is the strength of competition in industry. In this component, you must focus on number of competitors, quality differences, other differences, switching costs, and customer loyalty. Where your business is in tight competition, it makes the industry is not attractive.

By using Porter’s five forces model, we can know the condition of our company’s industry. This analysis will be the best consideration to make decision for the right strategy for your company to face and to lead the industry. So, let’s analyze your company and chose you’re the best strategy!

Written by Dera Hafiyyan