Day #29: Porter's Five Forces

At yesterday's post we mentioned several analysis tools that were used in the report, like SWOT, PESTLE and Porter's Five Forces. The former two are very well know, or at least more familiar to the reader. The latter is also widely used, but it may be hidden deeper in our memory. So let's review it!

Porter's Five Forces analysis helps to determine the competition level at a certain industry, therefore it is useful when starting a new business or expanding to a new sector. Basically, the state of competition depends on five forces:

• Threat of new entrants, which depends on the barriers to enter a certain industry. For example, such threat is low in the airline industry - important investments are needed - but it is quite high in the app market - almost everybody can launch a new app!.

• Bargaining power of suppliers, which depends on the number of suppliers and on whether it is easy or not for a company to find a substitute supplier and switch. For example, the power of suppliers is high in the airline industry - how many aircraft manufacturers can you think of?.

• Bargaining power of buyers, which depends on how much pressure buyers can put on a company. It is also related to the buyer's sensitivity to price changes and how easy it is for them to switch from one company to another. For example, in the airline industry such power is high - there are a lot of alternatives and the choice tends to be cost-driven -, but for Apple customers it is very difficult to move to another OS once they have become used to iOS products.

• Threat of substitute products, which depends on how many similar products there are in the market which respond to the same customer need. For example, threat of substitute products in the smartphone manufacturing industry can be considered as high - there are lots of brands to choose from!

• Rivalry among existing competitors, which depends on the total number of competitors and what each competitor can do. For example, in the airline industry there is a high rivalry between airlines.

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