Tools of strategic management. Analysis of 5 Porter forces: an example

For successful business, you needconsider a lot of factors that often escapes the attention of entrepreneurs. However, if you study the economy more carefully and diligently, you will learn a lot of different approaches that allow you to competently and efficiently analyze financial activities. One of the most interesting examples is the analysis of 5 Porter forces, an example of which will be discussed in detail in this article. But first of all it is necessary to understand what it is, what it is oriented at, and what it will allow you to achieve. You can be sure that you will definitely need a tool like Porter's analysis of the five forces. The examples in the text will serve as a vivid confirmation.

What it is?

This model was described in 1979 by the well-knowneconomist Michael Porter. He did this in order to create a full-fledged model that would allow the company to analyze its productivity and competitiveness, and in the future also maintain these indicators at a high level. After almost forty years, you can see how well the analysis of Porter's five forces works.

Examples of its use in life are the mostvarious. Such analysis is used by factories, restaurants, banks, and other enterprises that have competition in the market. Accordingly, if you want your business to be successful, you need to think about how to study this model. And this article will help you understand what the analysis of Porter's five forces is. Examples of its use will also be presented to your attention. The second half of the article will be devoted to examining one big example step by step.

Model Description

When Michael Porter created this model, he said that there are five diverse forces on the market, each of which determines the competitiveness of the product:

• market power of buyers, which they have in a particular segment;
• market power of suppliers, which affects the supply of raw materials to enterprises;
• the threat of new market participants entering the market, capable of increasing competition;
• the danger of the appearance of substitute goods with the best price-quality ratio;
• level of competition within the chosen market.

This is the 5 forces of Porter. An example of the analysis will be described in the second part of the article, but for now it is necessary to concentrate directly on the consideration of each of the forces. At first glance it may seem that no analysis on these areas can not be done, but in fact the result may surprise you. With the help of this approach, you will be able to analyze the activities of your enterprise and the competitiveness of its products in the market, in order to further make certain adjustments that will allow you to improve certain indicators in the long term. So, the 5 forces of Porter will be discussed in detail later, the example of the analysis will also be presented in detail, so that as a result you will know everything necessary about this method.

Using the model

How to use the analysis of 5 forces in the real worldPorter? Example: "Izbenka" is a Russian chain of stores. The purpose of such an event is to determine the competition in a particular market segment, so you can calculate how logical the introduction of the product is, whether you will have to make extra efforts to achieve the desired result, and so on.

Thus, this model is used inmodern economy to compile a detailed competitive analysis of your company's products, as well as the selected market. Now you are certain that it is extremely necessary to use the method of Porter's forces. An example of an analysis of a bank or any other company can confirm this in the future, but now it is necessary to concentrate on considering each individual force.

The threat of invasion of new entrants

An analysis of the five Porter forces on the example of a cafe can veryin detail to show what constitutes the first force, that is, the threat of invasion of new participants. So, there is a certain market, on which there are already operating companies with their goods and services. New participants increase competition, that is, if there are new cafes on the market, fewer customers can start to go to your institution. How do you assess the level of threat? Here Porter identifies several factors affecting the input barrier. If it is high, then the threat will be lower, since not everyone will want to overcome it.

What are these factors? First, economies of scale. If the volume of production in the market is large, the cost of one unit will be low, so new participants will find it difficult to achieve a positive profitability. Secondly, it is product differentiation - the more the available goods or services are on the market, the more difficult it will be for a new participant to compete. Thirdly, it is the need for capital - the higher the initial investment threshold, the less likely that new entrants will enter the market. Also worth noting the height of costs, access to distribution channels and government policy on production for a particular market. Naturally, the factors are not limited to this - there are additional threats that depend directly on the sales market and current conditions.

The market power of buyers

If we talk about the second force, it is important hereunderstand that it is best to choose the market where the buyer has the least power and the weakest influence. Why? The reason is that customers are consumers of your goods and services, that's why the market exists at the expense of them. Influential customers with a lot of power can directly influence your products, demanding higher quality, making their demands and so on. So the less the level of influence of buyers in the market, the better for you.

There are several conditions for the growth of influencebuyers: for example, the lack of uniqueness of goods (the buyer can choose any, not just your product), high sensitivity to the price (the buyer chooses not your product, and the cheapest option), and so on.

The market power of suppliers

The market power of suppliers manifests itself not sooften as the power of buyers, but its impact can be very strong. The matter is that suppliers, as a matter of fact, are owners of resources, without which the company can not carry out the activity. And in some situations, suppliers get a much higher level of power - for example, when there are not too many on the market (or when there is a monopoly on the market), when the resources used to produce the goods are limited, and the costs of switching to alternative raw materials will be too high. In such situations, suppliers have more power than usual, and they can directly affect the market environment, and at the same time, competition.

The appearance of substitute goods

Substitutes are those goods that canoffer a profitable alternative to your products. If you have high-quality analogues, your profit will be very limited. A serious threat is made up by those substitutes that offer a more tempting balance of quality and price. While the consumer can buy less quality goods more cheaply, he will not buy yours.

Also, the threat posed by substitute products fromknown brands that have already gained impressive popularity in other markets and are now planning to achieve the same result on the new one. It is necessary to fight with substitutes by creating our own strong brand, increasing the differentiation of goods, eliminating standardization and so on.

Intra-industry competition

And, of course, do not forget that onCompetition in the market most influenced by the participants there. The level of competition in the market will be high if there is a large number of participants with approximately equal production volume, low product differentiation, high entry barriers to the market and so on. High competition, of course, reduces the profitability of the industry, so you need to pay special attention to this item.

Assessment of the competitiveness of goods and the level of competition

Well, you already know all about the forces you described.in 1979, Michael Porter, now you can safely analyze the 5 forces of Porter on the example of a cafe, restaurant, shop or any other institution. But in order to increase the efficiency of the analysis, you should standardize it. This is what will be discussed further.

An example of the analysis will now be described in detail.broken into four steps. The first is to assess the competitiveness of your product and the level of competition in a particular market. As part of this step, you need to evaluate the substitute products that are on the market, giving them a rating from one to three, where one is the lack of substitute products, two is the presence on the market with a low share, and three is the presence of high market share. If you get one point, the threat level is low, if two - medium, and if three - high.

The next item is an analysis of intra-industry competition, one of the most important among Porter’s 5 forces.

An example of a store analysis might look like this. There are four points in total: the number of participants in the market, the growth rate of the market, the level of product differentiation and the limitation in price increases. Naturally, each of these points also has its own criteria by which they can receive from one to three points. If we are talking about an ordinary store, the market saturation level will be high (3 points), as well as the market growth rate (1 point), the products of companies will differ greatly from each other (1 point), and the possibility of price increases will be available only within cover costs (2 points). The result is 7 points, which gives an average level of intra-industry competition.

As for the entry of new participants into the market,there are much more parameters: economies of scale, strong brands, product differentiation, as well as all the criteria that were described in the theoretical part. If we talk about a specific example of a store or cafe, then it can be assumed that only a few participants will have economies of scale (2 points), product differentiation will be average, and participants will be willing to reduce prices, except for large representatives. The remaining parameters will be at a high level, that is, they will receive three points each.

As a result, we have a high level of threat of the emergence of new players. Now you can see from which side there is the biggest threat to your business.

Evaluation of market power of buyers

However, these are only three steps, and you need to takeinto account all 5 forces of porter. An example of analysis in banks will allow you to understand how to analyze the power of buyers. Here the result will be expressed in high, medium or low probability of losing customers. In an average bank, about half of the income comes from powerful customers, while the other half comes from the rest (2 points). Also, two points are obtained when evaluating the tendency of customers to switch to substitutes, since the services offered by the bank are only partially unique.

In addition, customers have highprice sensitivity, that is, they will always try to switch to the offer that is more profitable. Also, customer dissatisfaction can be estimated at two points. And in the end, it turns out that the probability of losing customers is high.

Supplier Market Power Assessment

That is the end of the analysis of 5 competitive forces.Porter. An example will tell you about the latest strength concerning suppliers. Here, the assessment should be given on a two-point, not three-point scale. An analysis of Porter’s 5 forces on the example of a restaurant shows that everything is fine with suppliers in the market - there is a wide choice of options, there is no limit on the volume of raw materials, if you need to switch to another supplier, the costs will not be too high, and for the supplier itself this industry has a high priority . In the end, it turns out that suppliers have virtually no effect on the market.

Summarizing

We studied in detail the 5 forces of Porter. An example of an enterprise analysis ends with a debriefing. You need to analyze each of the five forces, determining whether it has a high, medium or low value for your company in a particular market, then describe each of them in detail and, if necessary, develop a direction to improve the situation for you.