Welcome to another instalment in Professional Academy's series of Marketing Theories Explained. Porter's Five Forces is another valuable tool in the marketer's strategy toolkit. It is used to assess the level of competitive intensity within an industry, and, as the name suggests, the concept was created by Michael E. Porter. You can explore more models in the series on the Marketing Theories page.
Porter believed that by understanding the level of competitive intensity, an organisation could determine the attractiveness of an industry. When marketers talk about industry attractiveness, they are referring to the profitability of the industry rather than how appealing it is in any other sense. Porter identified five factors, or forces, acting upon an organisation that together determine this level of competition, which is where the model takes its name.
Competitive Rivalry
A key factor in competitive intensity is competitive rivalry itself. To assess it, marketers should consider how many competitors they have, whether a solid competitive strategy is in place, and whether they are innovating in a way that gives them a competitive advantage. It is also worth asking whether competitors have greater advertising resources, whether there is a difference in quality, and how loyal the organisation's customers, and those of its competitors, are.
Threat of New Entrants
If an industry is perceived as attractive, new entrants are highly likely to appear. If too many new entrants arrive, profitability across the industry falls and its attractiveness declines. The threat of new entrants can be lowered, or even blocked, by the largest companies that hold something approaching a monopoly. Marketers should consider whether there are significant entry barriers, since high entry and low exit barriers make an industry more attractive. Entry barriers may include rights, patents and technology protection. It is also worth considering customer loyalty, whether specialist knowledge can be used to differentiate the organisation, whether economies of scale are in play, and whether any government policy exists to encourage or discourage new entrants.
Threat of Substitution
Customers may choose to substitute a product or service for another. This is not the same as switching to a different company for the same product, but switching products entirely, for example moving from a regular phone to a smartphone, or from a sugary snack to a healthy alternative. The more substitute products that appear, the higher the chance customers will be drawn away from their usual choice. To assess this, marketers should consider how many substitute products exist, whether there is a perceived level of differentiation, whether there is a cost to the buyer for switching, and how easy switching actually is.
Supplier Power
Every organisation has suppliers, whether of raw materials, knowledge support or physical labour. A great deal of research and consultation goes into securing the best suppliers at the best price, but choice matters: the fewer suppliers available, the more power they hold over an organisation and the prices they charge. Marketers should consider how many suppliers are available to them, the size of those suppliers, the costs to both parties of switching suppliers, and the strength of their distribution channel.
Buyer Power
When buyers hold power, they can apply pressure to companies, particularly pressure to lower prices. If a buyer has many products and companies to choose from, their power is high. If buyers join together so that a large portion of the market share applies pressure collectively, that power grows further. To prepare for this, marketers should consider how many buyers they have, how price-sensitive those buyers are, what information buyers hold about them, and what differentiates the organisation from its competitors.
Putting the five forces to work
Porter's Five Forces can prove genuinely useful for marketers and strategy consultants. It allows them to see their current strategic position and plan for the future by acting on their strengths and addressing their weaknesses. It is especially valuable when considering entry into a new industry, highlighting how likely an organisation is to succeed. As with any model, other tools are also worth using when assessing issues beyond competitive intensity as part of a wider strategic action plan.
Learn more with the video series
For a more visual explanation, the short animated video below outlines how to use Porter's Five Forces as a marketing tool.
How Professional Academy Supports Your Journey
Porter's Five Forces is taught as part of both the CIM Level 4 Certificate in Professional Marketing and the CIM Level 6 Diploma in Professional Marketing, as well as throughout the ISP sales qualifications. To learn more about these qualifications, the qualification advice team is on hand to help. If you would like help referencing this blog, see the Harvard Referencing blog.
