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

For the successful conduct of business, it is necessary to take into account 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 an analysis of Porter's five forces. Examples in the text will serve as a vivid confirmation.

What it is?

This model was described in 1979 by the famous economist 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 very diverse. 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 company and the competitiveness of its products in the market, in order to further make certain adjustments that will allow you to increase 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 Porter forces in the real world? Example: "Izbenka" is a Russian chain of stores. The purpose of such an event is to determine the competition in a specific market segment, so you can calculate how logical the introduction of the goods is, whether you will have to make extra efforts to achieve the desired result, and so on.

Thus, this model is used in the modern 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 apply 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 new invasion

Analysis of Porter's five forces on the example of a cafe can show in great detail what the first force is, 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 to assess the level of threat? Here Porter identifies several factors that affect the entrance 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 on the market is large, the cost of one unit will be low, so it will be difficult for new participants to achieve a positive profitability. Secondly, this differentiation of the product - the more on the market of available goods or services, the more difficult the new participant will compete. Thirdly, this 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 to understand 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 great 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 increasing the influence of customers: for example, the lack of uniqueness of the goods (the buyer can choose any, not your product), high sensitivity to the price (the buyer chooses not your product but the cheapest option), and so on.

The market power of suppliers

The market power of suppliers manifests itself not so often as the power of buyers, but its impact can be very strong. The fact is that suppliers, in fact, are the owners of resources, without which the company can not carry out its activities. And in some situations, suppliers receive 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 Are 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 products that can offer a lucrative 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 is represented by substitute products from well-known brands that have already gained impressive popularity in other markets and now plan 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 the competition 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 product competitiveness and competition level

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

Now an example of the analysis, broken into four steps, will be described in detail. The first is to assess the competitiveness of your product and the level of competition in a particular market. In this step, you need to evaluate the substitute products on the market, giving them an estimate of one to three, where one is the absence of substitute products, two is the presence in the market with a low share, and three is the availability of High market share. If you get one point, then the threat level is low, if two are average, and if three is high.

The next point is an analysis of intra-industry competition, one of the most important among Porter's five forces.

An example of a store analysis might look like this. In total, there are four items: the number of participants in the market, the rate of market growth, the level of product differentiation and the restriction in price increases. Naturally, each of these points also has its own criteria, according to which they can receive from one to three points. In the case of an ordinary store, the saturation level of the market will be high (3 points), as well as the growth rate of the market (1 point), the products of the companies will differ greatly (1 point), and the price increase will be possible only within the framework Coverage costs (2 points). As a result, we get 7 points, which gives an average level of intra-industry competition.

As for the entry of new entrants into the market, there are many more parameters: economies of scale, strong brands, product differentiation, and all the criteria that have been described in the theoretical part. If we talk about a specific example of a shop or a cafe, we can assume that only a few participants will have economies of scale (2 points), product differentiation will be average, and participants' willingness to reduce prices will be high, 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 appearance of new players. Now you can see from which side there is the greatest threat to your business.

Evaluation of the market power of buyers

However, these are only three stages, and it is necessary to take into 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. An average bank somewhere half the income comes from influential customers, while the other half comes from the rest (2 points). Also two points are obtained when assessing the propensity of clients to switch to substitutes, since the services offered by the bank are only partially unique.

In addition, customers are highly sensitive to the price, that is, they will always try to switch to that offer, which is more profitable. Also, clients' dissatisfaction can be estimated at two points. And in the end it turns out that the probability of losing customers is high.

Market power evaluation of suppliers

So the analysis of Porter's competitive forces comes to an end. The example will tell you about the latest strength regarding suppliers. Here, the evaluation should be given on a two-point scale, not a three-point scale. Analysis of 5 Porter forces on the example of the restaurant shows that everything is fine with suppliers in the market - there is a wide choice of options, there is no restriction in the volumes of raw materials, if the need to switch to another supplier costs will not be too high, and for the supplier this industry has a high priority . As a result, it turns out that suppliers have virtually no effect on the market.

Summarizing

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