5 Porter’s strengths: what is it and how to use it in companies?
Porter’s 5 Forces is an important corporate tool to analyze and assess the external environment in which companies operate and to better understand and identify possible market opportunities.
Its application, by the way, is an excellent way for companies to organize their processes and start to maximize their results.
Know your own market, know how attractive your company is and, from there, generate profits.
This is certainly a scenario that any entrepreneur chases after daily, isn’t it? But, for that, it takes method and analysis – and you know it very well.
There are no results without work, without effort, nor does the reward come easily.
Within this mission, discovering relevant information about the competition is something that undoubtedly matters a lot.
Adapting strategies, directing efforts and also resources assertively are possible actions with the application of Porter’s 5 forces.
In this article, we’ll talk better about its concept, application and also the benefits that this analysis brings to companies of all segments and sizes.
Let’s check it out?
What are Porter’s 5 Forces?
It is a tool that dates back to the 70s and was named after its creator: Michael Porter.
Its objective is to carry out an analysis and make an assessment of the external environment in which a given company is inserted.
It serves to measure how competitive an organization is in relation to its market in comparison with the competition and its practices.
This method works by identifying the quality of the solution your company sells compared to other competitors – always taking into account how competitive the segment is.
If we want to come up with a definition of what this competitive analysis encompasses, we can think of some questions to be answered:
- Is my company in a profitable market?
- Is there growth capacity and room for new investments?
- What are the competitive practices and how are they positioned?
The more questions you have, the more detailed the result the analysis will bring.
In his conception, Porter’s 5 forces were created to be factors that never change and are independent of other variable factors, such as government interventions, technology impact or even volatility in your sales conversion rate, for example.
Although, of course, factors such as digital transformation have a very important influence that cannot simply be ignored.
That said, the strengths are:
- Rivalry among competitors;
- Bargaining power of suppliers;
- Customers’ bargaining power;
- Threat of entry by new competitors;
- Threat of substitute products/services.
But we will talk about them in detail later on.
How to apply Porter’s 5 forces and what is their importance?
Porter identified, at the time of the tool’s creation, 3 ideal ways for the five forces to be applied.
They, by the way, are suitable for any type of company, regardless of its characteristics.
According to him, it is important that companies:
- seek at all times to reduce costs to increase profit or else lower prices (and maintain current profit) to increase market share;
- stand out a lot in terms of the solution sold to customers, betting on constant improvement and assertiveness in sales and marketing techniques;
- be focused to know the market well, its variables and focus on the right audience to increase sales and reduce the negative impact of the other 5 forces of Porter.
Its application is extremely important for companies. And, let’s be clear, it doesn’t matter the size of the company: This is a useful tool for everyone.
This will help decisively in the strategic planning of your business, being able to know what is really worth focusing on.
More than that, it is possible – with the correct information collected – to carry out sales planning focused on healthy growth.
It is not enough to simply have a good idea and put it into practice. It is always necessary to be in search of more and more control of situations.
Only in this way is it possible to have a really solid, efficient administrative management that guarantees the conditions for the company to always grow.
A Bigger View of Porter’s 5 Forces
The search for a bigger market share, for the client’s success at all times and for better results is constant.
Therefore, understanding exactly what Porter’s five strengths are is an important competitive differentiator.
More than that, knowing how to apply within your business, having processes that are more oiled and that deliver value to consumers is a very likely reality.
Let’s go into detail?
1 – Rivalry between competitors
The first of Porter’s 5 strengths harks back to the current level of rivalry existing between you and your direct competitors. It talks about the current degree of competition that exists.
This is important to be clear about whether the market is saturated or exactly uncompetitive.
If this is the case for the last characteristic, it could mean that there is no high demand. And that can make the product or service sold quickly become obsolete.
But it is also important to understand if there is fierce competition for a small number of customers.
If that is the answer, then we will undoubtedly have a saturated market and your company’s power is, therefore, less than you think.
For that strength, ask things like:
- how many direct competitors exist in the segment?
- How does competition with competitors occur, by price? By product? By what factors?
2 – Negotiation power of suppliers
The second force talks about the bargaining power that suppliers have over your company. But what does this mean?
In other words, this analysis serves to determine how much your market position depends on who supplies your raw material.
So here we can apply the logic: if the number of available vendors is large, you have control.
You can buy cheaper and your demands will certainly be ahead, achieving better conditions and even differentiated service.
But if there is a shortage of suppliers… well, then the logic is reversed.
Prices are higher, your control over the situation is lower and you will be at the mercy of prices, terms and all kinds of conditions that are imposed on you.
For that strength, ask things like:
- How many suppliers are there in the sector?
- is there a lot of difference between one and the other and what is the cost of switching suppliers?
3 – Customers’ bargaining power
It is important to understand the customer’s bargaining power and, for that, the criteria to reach this answer are the same as above.
Thus, the greater the level of competition present in the market, the greater control over the sales process the customer will have.
After all, he will have many options to choose from and will be able to make a smoother decision. And that will likely make both your CAC and your company’s sales cycle longer.
If there is a shortage of offers, the customer will find themselves in a difficult situation to find the solution they need.
In this scenario, control is in the hands of the seller. If this happens, it is possible – for example – to raise the average ticket.
However, if this happens and the customer joins the company, he becomes an important part of the revenue.
Thus, a churn, for example, would bring big problems. And, within this context of co-dependence, bargaining power finally becomes balanced.
For that strength, ask things like:
- what is the ratio of potential customers to suppliers?
- what power do consumers have to dictate the course of business?
- How does the average ticket value impact the customer relationship?
4 – Threat of entry of new competitors
How much power do you and your old rivals have to at least make it difficult for new players to enter your market?
This, however, will also depend on the segment in which it operates and which are more susceptible to the impact of technology.
Often, there will not be room to be disruptive to the point of stopping the entry of companies that will fight for their customers.
It will help, and a lot, the fact that your brand is well consolidated and you have always satisfied customers.
To find out how satisfied your customers are, running an NPS survey can be of great help.
And for that strength, ask things like:
- how much does it cost to open a new business in my industry and what are the other barriers?
- are there investment funds for the sector my company is in?
5 – Threat of substitute products or services
Not only can your competition leave your business behind. Sometimes, it becomes obsolete due to new innovative products or services.
This strength of Porter is worth analyzing very calmly. You have to fully understand the big picture and how technology can work for and against you.
The digital transformation brought new realities to companies and all that did not adapt to it certainly lost relevance until they disappeared.
Literally overnight, what used to be conviction and innovation can be outdated – and you don’t want that for your company.
For that strength, ask things like:
- is there any design or prototype that can replace what I sell?
- is it easy to develop something that makes my product obsolete?
- how can I add innovation to what I sell?
Extra: Porter’s sixth force
Weren’t the 3 Musketeers actually 4? So Porter’s 5 forces are 6.
Although there is no official recognition in the original article where the analysis was described, it is a fairly common corporate practice.
It refers to a strategic alliance between companies that, by uniting their products or services, offer the market a much more complete solution.
It is common to see this practice, especially in SaaS organizations to become stronger against the competition.
But actually, it’s been something that’s been around for a long time – and maybe you haven’t even realized it.
A simple example of this is the restaurants, which join a brand of drinks and distribute, in all their branches, only that brand.
This is an efficient and quick way to be able to remain competitive with competitors.
More than that, to prevent new players from being able to impact potential customers who are in the market.
If these partnerships happen in the right way, it is possible to deliver a lot of value to consumers.
Such a path is, without a doubt, the ideal scenario. After all, you will be growing and being even more of a reference in the area in which you work.
So, how can we help you?
If you were in doubt about the article or want to share some “pain” in running your business.
Enjoy and read two articles that will help you identify threats and opportunities in your market.
The first talks about what benchmarking is and how it helps companies achieve better results.
The second addresses how the BCG matrix is important to identify good businesses and leverage your business.
Porter’s 5 Forces is an important corporate tool to analyze and assess the external environment in which companies operate and to better understand and identify possible market opportunities. Its application, by the way, is an excellent way for companies to organize their processes and start to maximize their results. Know your own market, know how…