Porter 5 Forces

Porter’s Five Forces: A Short Explanation

Porter’s five forces is an abstract concept of how business can be affected by particular or series of industry landscape changes.

Porter 5 Forces
Porter 5 Forces Diagram. Taken from How Smart Connected Products Are Transforming Competition

Rivalry Among Existing Competitors

What the hell is rivalry. Say, we have A company and your best friend has B company. Do we consider your friend as a rival? It depends.

Your friend sells Sponge Bob stuffed animal and we sell Rambo’s machine gun replica. Hell no, you and your friend ain’t rival. Why? The keyword here is product. When you are not selling the same product like the others, then you’re not rivaling.

But, if you are selling talking and dancing Sponge Bob stuffed animal (TDSBSA) that superior than your friend, then you become rival. Your TDSBSA becomes a force that change the competitors behavior. A force that forcing your friend to either develop product better than yours or set a competitive pricing aka cheaper.

In fact competition is not only between you and your friend, but also the other guys. Your TDSBSA will affect their business decision too, they might think of start selling TDSBSA to the customers. When they do, you change their behavior, you change the industry landscape.

Threat of New Entrants

I think this one is very obvious. If there is competitor joining the industry or selling the same product as you are, but the difference is it comes with huge product promotion,  and extraordinary marketing campaign, sure it will make all those who sell the products will be panicked including you.

You and other guys are panicking because thinking of your revenue will be decreasing and it does. That’s the real pose of threat of new entrants.

Bargaining Power of Buyers

Customer is a king, without them you’ll get no revenue. The statement explains itself. Once you get a bunch of bad reviews and disappoint the king, you’ll be executed, in this case the buyer will come to your competitors and never come back.

This buyer’s power mainly exists when there are many sellers and fewer buyers in the market. Additionally, the customers are also protected by Consumer Protection Act or Law, so that’s give them more strengths. This type of protection (by law) is vary among countries. So, you have to take a look at it to measure how far buyers can affect your business.

Bargaining Suppliers

The lesser number of suppliers the higher the price they’ll provide to you. Say, you are a businessman who run a textile business. You need at least two raw materials, fabric and coloring agent. Your business provides the rare textile color in the market which is obtained from either X supplier or Y supplier. One day, the Y supplier gone bankrupt, then the only player now is X supplier.

Since the demand is standing still, and the supply decreased, then logically the price of the color, as your material, will go sky rocket. The X supplier will have the power to bargain you as their customer. If you don’t pay with the right amount they’ll give it to the paying customer.

You couldn’t capture your demand due to raw material unavailability, but then your competitor will.

Threat of Substitute Product or Service

Do you like McDonalds? Of course you do. What will happen if you’ve found a new Sushi restaurant which serves you 1.5x portion, 2x tastier, 3x healthier, but with $1 more expensive menu than McDonalds. The odds are you’ll be spending more money to the Sushi restaurant rather than McDonalds even if the Sushi cost you more.

McDonalds and Sushi serve different menu, but you find Sushi restaurant more valuable than McDonalds, right? That’s making the Sushi restaurant becomes a threat of substitute product for McDonalds business near your area.

That’s all.  I hope The Porter’s Five Forces explanation above can help you to understand the concept.

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