Porter’s 5 forces are factors used so that a company can analyze the market in which it is inserted, with the aim of achieving a comprehensive vision of the competition and positioning itself with greater advantages.
It was conceived by Michael Porter in 1979, in his article entitled “The five competitive forces that shape strategy”, and made competitiveness a tactic for companies, with more relevance than simply considering a rivalry between them.
With the use of this tool, the entrepreneur develops future business strategies for changes in the external environment (sales, customer attraction) and the internal environment (production, provision of services), pointing out the strengths and weaknesses of their activities.
Porter’s competitive forces
The analysis of these five competitive forces can be carried out in any type of company, however, it requires taking into account a very complete vision of the business, in all sectors of the company.
In his model, Porter considered that there is the first central force and the other four, influencing the company in different ways. They are:
1. Rivalry between customers
This is considered the main strength, which shows the intensity present among the company’s direct competitors. The greater the rivalry, the greater the price dispute and the need to invest in the innovation of the product or service offered, which can jeopardize the profits of the company.
Therefore, in the competitive environment, it is necessary to take into account, mainly, the number of direct competitors, how the company’s brand is recognized and differentiated by the public and what are the competitive advantages, such as costs or the ability to negotiate with suppliers.
2. What substitute products or services
Substitute products or services are those that customers seek, since there is the possibility of changing without losing the same usefulness, or approaching the same satisfaction.
Great pressure from substitute products can cause a decrease in prices and, consequently, in the profitability of the company.
When analyzing this factor, it is necessary to know which competitors may present these signs and make investments in quality and marketing, seeking to acquire better guarantees for the products and maintain a good position in the market.
3. What is the bargaining power of the suppliers?
Suppliers have an essential role for the company as a whole, since they provide inputs (raw materials, components or services) for the proper functioning of the company.
However, the acquisition of what is necessary includes costs, and the entrepreneur’s negotiating power may depend on the number of available suppliers, which in cases of low availability, can damage the company, offering higher prices, low quality and deadlines. high delivery times
4. What is the bargaining power of customers?
Customers seek the lowest prices and the best quality items or services, making available competitors compete to satisfy these interests. Once again, the company’s profits are threatened.
This decision power is given by the levels of the number of customers that are attracted, the importance that the product can have or also the threat of substitute products or services, mentioned above.
5. Entry of new competitors.
The possibility of entering new competitors in the same market arises with the interests of the new entrepreneurs, by obtaining a portion of what is marketed.
It becomes difficult or impossible, since the companies already present have the facility to reduce costs, increasing the utility of the productive factors they have, creating advantages that the new rival companies could not have.
Other existing barriers are, for example, the temporary reduction of prices, the creation of greater competitive advantages or, in more extreme cases, obtaining patents as a form of protection.
Generic carrier strategies
Later, Michael Porter described the offensive and defensive actions that a company can take, as a competitive strategy that will be created within the market in which it operates.
There are 3 strategies:
- Total Cost Leadership – Streamline efforts to reduce all possible costs;
- Differentiation: investments in quality, which makes it a differential for customers;
- Focus: focus on different types of consumers, to reach the right customers.
Examples in companies
Porter’s strengths can be analyzed in notable companies, such as the Coca Cola Company , which has long dominated most of the market in which it participates. The other competitors face a company with enormous competitive advantages, a leader in controlling its costs, leading the negotiation with its suppliers and influencing its customers.