Inside the discipline of strategic management we find the Porter analysis. As we know, Porter analysis is a model created in order to analyze the level of competition of a project and in this sense the business strategy that the company wants to develop. This comparison is established within a sector or an industry.
Why is this analysis so important?
Porter analysis takes into account five different forces. These forces determine the competitive intensity and also the attractiveness of the company and therefore their products inside the market. In this analysis the forces make up a micro environment. In this sense, the forces are close to a company since they affect its ability, the customers, and also the probability to make a profit.
Also, we must highlight that Porter’s analysis is the most used alternative to SWOT analysis. Porter’s five forces analysis has been used in a diverse range of situations, at that point, it is interesting to know that Porter’s analysis could be applied in both the private or public sphere, so it is logical to think that Porter model includes the value chain and also the generic strategies.
The five forces
Since we know what Porter analysis is and what its purpose is it is important to establish and analyze the five forces that are involved in the nature of this strategic framework. This model comprises entrants, substitute products, customers, suppliers and rivalry.
- The threat of new entrants. A profitable market would attract the appearance of new firms and companies. Here we must analyze how difficult it is to enter in the market of our business and which are the barriers.
- The threat of substitute products or services. There are markets that are very specific, however there are others where companies see how more and more firms appear everyday that create similar products and therefore substitutes.
- The bargaining power of customers. This could be a threat in the sense that customers and clients agree the price that they want to pay. In most of the cases, the group of customers would agree a price that is lower than the price that the company would want to set.
- The bargaining power of suppliers. Suppliers could have the power to raise the cost of the products or services since they are the ones that provide the company the development of the business model.
- Intensity of competitive rivalry. The competitors are one of the main reasons why a company is profitable or not. Analyzing them into a concrete market is interesting to know if our business plan could be developed.
Each market or each industry has different strengths; however the five forces help the strategic executive to figure put which elements determine profitability in each field, and also which are the main tendencies and restrictions.
The main barriers are settled in the development of technology because for example, Internet is changing day by day the nature of the five forces and how they are not shaped in the same manner as they were used to. To take into account those changes is important to reach success through our business plans.