Porter's Competitor Analysis Framework

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  • 0:02 Porter's Five Forces Model
  • 1:12 Rivalry Among Existing…
  • 2:29 Threat of New Entrants
  • 3:30 Bargaining Power of…
  • 5:37 Threat of Substitute Products
  • 6:44 Lesson Summary
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Lesson Transcript
Instructor: Tara Schofield

Tara has a PhD in Marketing & Management

Understanding competition and the potential threat to your business is critical to a successful business. By utilizing Michael Porter's Five Forces Model, you will be able to better analyze the competition in your industry.

Porter's Five Forces Model

All businesses have threats and are impacted by outside factors. But most industries contain many companies, and a threat that affects one company may have little impact on another. As a result, determining what problems a company may face requires looking at the individual firm and the industry it's in. This provides a more individual and specific approach to planning for and addressing threats.

Let's imagine you own a small electronics store. You sell televisions, computers, Blu-ray players, and a wide variety of accessories. Because there's a lot of competition in this industry, you are constantly considering what could change with buyers, suppliers, companies entering the market, and the number of substitute options. You determine you can benefit by doing a Porter's Competitor Analysis, a five-step approach for analyzing competition in an industry.

The five forces of Porter's Competitor Analysis that dictate competitors' power are:

  • Rivalry among existing competitors
  • Threat of new entrants
  • Bargaining power of buyers
  • Bargaining power of suppliers
  • Threat of substitute products

Let's review each of these steps:

Step 1: Rivalry Among Existing Competitors

Competitive rivalry is affected by many factors. The size of the competitors is important; the larger the competitor, the more resources that company may have to overpower their smaller competitors. In addition, businesses that are in a growing market can experience more competition from other companies who are fighting for a larger piece of the income. On the other hand, when the market is flat or declining, competition may be more stiff as companies are fighting to maintain their market share and make as much money as possible.

In your electronics store, you face tremendous rivalry from competition. In your industry, not only are there many firms, but there is also a lack of unique products. This causes more competition because you are not offering anything that the competition is not also offering. The items you sell are the same brands, sizes, and styles as other electronic retailers, which makes it difficult to differentiate yourself from other electronic stores. You also struggle because of your business's high fixed costs. You must sell a lot of inventory every month, at a slim margin, to cover your expenses. This causes you to offer discounts and specials to maximize the volume of sales in your store. Unfortunately, your competitors employ the same strategies.

Step 2: Threat of New Entrants

If an industry's profitable and growing, the threat of new entrants can become a concern. If it's easy and inexpensive for new companies to enter the market, then competition will increase as more businesses fight for pieces of the market share. Alternatively, if there are barriers to entering an industry, such as needing access to patents or trying to enter a market that has extremely loyal customers, then the threat of new entrants is alleviated.

Your store has been the only electronics center within a five mile radius. This has been beneficial for you because consumers come to your store out of necessity. However, because electronics and technological gadgets are extremely popular and available to all, your industry is an easy one for new businesses to enter. Now, you've just heard that a new electronics store is opening less than two miles from your location. This creates new concerns because consumers will now have another option for purchasing their items. You fear your sales could drop drastically.

Step 3: Bargaining Power of Buyers

In some industries, buyers carry substantial power. This is especially true with businesses that carry products that are widely available and easy to purchase. These buyers know that they can purchase from many different companies, so they are going to demand discounts and additional services from you, in order to keep their business. In addition, the satisfaction of your customers is very important. If consumers unite to boycott a company or rally to support a business, the company can be highly impacted. Likewise, if buyer preferences change, a business may struggle to meet buyer needs. Conversely, companies who offer rare and/or very expensive items are many times able to use that exclusivity to reduce, or eliminate altogether, the bargaining ability of buyers.

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