Porter’s 5 forces are factors used so that a company can analyze the market it is inserted in, aiming to get a comprehensive view of the competition and position 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 just considering a rivalry between them.
Using this tool, the entrepreneur develops future business strategies for changes in the external environment (sales, attraction of customers) and internal environment (production, service provision), pointing out the strengths and weaknesses of his activities.
Porter’s competitive forces
The analysis of these five competitive forces can be done in any type of company, however, it requires taking into account having a very comprehensive view 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, which influence the enterprise in different ways. Are they:
1. Rivalry between customers
This is considered the main strength, which demonstrates 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 may jeopardize the profits of the enterprise.
Therefore, in the competitive environment, it is necessary to take into consideration, 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 look for, as there is the possibility of change without losing the same utility, or that approaches the same satisfaction.
A great pressure of substitute products can cause a decrease in prices and, consequently, in the profitability of the enterprise.
When analyzing this factor, it is necessary to be aware of which competitors may present these signs, and to make investments in quality and marketing, seeking to acquire better guarantees for the goods and maintain a good position in the market.
3. What is the bargaining power of suppliers
Suppliers have an essential role for the enterprise as a whole, as they provide inputs (raw materials, components or services) for the correct functioning of the company.
However, acquiring what is necessary includes costs, and the negotiating power of the entrepreneur may depend on the number of suppliers that are available, which in cases of low availability, can harm the company, offering higher prices, low quality and deadlines. high delivery times.
4. What is the bargaining power of customers
Customers look for the lowest prices and the best quality items or services, making available competitors compete to serve these interests. Once again, the company’s profits are threatened.
This decision-making power is given by the levels of the number of customers that are attracted, the importance that the product may 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 new entrepreneurs, in obtaining a slice of what is marketed.
It becomes difficult, or impossible, as the companies already present have the facility to reduce costs, increasing the utility of the productive factors they have, creating advantages that new rival companies could not have.
Other existing barriers are, for example, the temporary reduction of prices, creating greater competitive advantages, or in more extreme cases, obtaining patents as a form of protection.
Generic Porter Strategies
Michael Porter later described offensive and defensive actions that a company can take, as a competitive strategy to 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, in order 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 are faced with a company with enormous competitive advantages, leader in commanding its costs, leading the negotiation with its suppliers and influencing its customers.