Porter's Five Forces: How to identiy attractive markets

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Some markets are more attractive than

others…

…but how do you tell them apart?

Leave it to gut feel?

Get stuck in to some analysis?

13,450 27

89 990

Get stuck in to some analysis?

13,450 27

89 990

Whether you are…

Working on a plan for a new

business

Contemplating the launch of a

new product

Reviewing the strength of your

own marketplace

…Porter’s Five Forces model can help

you understand your situation.

This model was developed more than

30 years ago by Michael Porter, a

Harvard academic. However, it

remains as relevant today as it was

when it was developed.

Porter’s Five Forces model

Competitive

rivalry

Supplier

Threat of new entrant

Threat of substitutes

Let’s take each of the five elements…

buyer power

How much power is held by the customer?

How many customers are there and how

many customers does a typical player

How much market share do the largest

customers account for?

What alternatives do customers have?

supplier power

How much power do suppliers hold?

How many suppliers are there and what

market share do the largest suppliers hold?

How distinctive are each supplier’s

products?

How straightforward is it for the customer

to switch to another supplier?

competitive rivalry

How much competition is there in the market?

How many competitors are there?

How much market share does each

competitor hold and how strong are

competitor brands?

How easy is it to win new customers?

threat of new

entrants

How likely is it that competition will increase

with new entrants?

What are the barriers to entry? Knowledge,

technology, distribution network, brand?

How much would it cost a new entrant to

enter market and how quickly would this

investment pay back?

threat of substitutes

What is threat that customers will switch to

different products?

What are substitute products and how

effective are they?

How straightforward is it for customers to

switch products?

Now, let’s look at an example…

clear water

Mike, an entrepreneur, is thinking about

launching a new bottled water company. Is it a

good move?

He uses Porter’s Five Forces model to structure

some analysis.

clear water

BUYER POWER:

First, Mike identifies the buyer. In this case, not

the ultimate drinker, but the retailer.

He finds that in his home country, 80% of sales

by value are through one of four supermarket

chains. The remaining 20% of sales are through

hundreds of independent outlets. The buyer

power is therefore STRONG.

clear water

SUPPLIER POWER:

Mike’s suppliers would include his workers, plastic

bottle manufacturer and transport company. As a

small operator, Mike quickly realises that he is

likely to have little power with most suppliers, all

of which are part of multinational companies.

However, he could achieve strong power over his

workers by choosing a location where

unemployment is high.

clear water

COMPETITIVE RIVALRY:

The bottled water market is very competitive, with

more than 30 suppliers in the UK alone. Mike finds

that 60% of the market is held by the three

largest companies. However he also finds that the

big retailers will stock smaller suppliers. The

nature of the product means that consumers will

switch very easily. Rivalry is therefore HIGH.

clear water

THREAT OF NEW ENTRANTS:

The level of competition suggests entry is

relatively easy. However the launch costs are

relatively high and suppliers need to find a spring

source for the product. The threat is currently

HIGH but could lessen as sources are claimed.

clear water

THREAT OF SUBSTITUTES:

Mike does a study of supermarket shelves and

finds that the average store selling 500ml bottles

of water sells 25 other drinks of a similar size

that could substitute for water. This is higher than

Mike realised. Water is by far the cheaper option,

but some extra research shows that shoppers

frequently substitute other drinks for water.

Threat is HIGH.

So, what did Mike learn?

clear water

This analysis highlights for Mike what a tough job

he is going to have making his company a

success. He could find it difficult getting his

product into big stores and, when he does,

shoppers may readily choose to buy other drinks

instead. If he does go ahead, Mike now realises

that if he chooses his location carefully he can

minimise wage costs.

What now?

clear water

Mike’s analysis prompts a series of questions:

Why am I well placed to launch a water

brand?

Would it be more beneficial to act as a

supplier to or buyer from water companies?

(eg open a retail chain)

How fragile is the market lead enjoyed by the

largest water companies?

The answer to these questions will determine

what Mike does next.

What now?

Learn more about Porter’s Five Forces here.

We have more information on this and other strategy tools and

themes at strategywrap.com. Why not take a look today?

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