School of Information Systems

PORTER’S FIVE FORCES OF INDUSTRY ANALYSIS

18 Oct 2023

Nowadays, many companies started their business. They provide many different offers for the same product. Because of it, competing for each company in an industry is needed. They must aim for their success and stay in the industry. They must know their strengths and weaknesses to hold their position in the industry competition.  

Many companies use Porter’s Five Forces to analyze their competitive environment. Using it, they could understand their competition’s level and enhance their long-term profitability. If they could analyze it correctly, they could also determine it properly, so the company could stay longer and increase its advantages. 

PORTER’S FIVE FORCES 

Porter’s Five Forces were developed by Michael Porter in 1979 to help companies to assess which industry to compete in and to position the company for success (Harvard Business School, 2012). It includes five forces: the threat of new entrants, the threat of substitutes, the bargaining power of buyers, suppliers, and the rivalry of competitors. 

a. The threat of New Entrants 

It refers to how easily newcomers can enter the industry and compete in a similar competition. The newcomers will make the competition between other companies tighter and may lead to lower profits (Pratama, 2020).  

There are six primary sources of it: 

  1. Economies of scale 
  2. Product differentiation 
  3. Capital requirements 
  4. Cost losses that are not affected by company size 
  5. Access to distribution 
  6. Government policy 

If the newcomers could get the customer’s trust, they would take many customers, and the threat would increase for the company. 

b. Threat of Substitutes 

Other similar products could replace some goods and services. If the alternatives have a more attractive price, for example, cheaper than the company’s product, the customer may choose the alternative. So, the company’s profit will be affected if the substitutes become wider and have many other varieties. 

c. Bargaining Power of Buyers 

The buyer’s bargaining power could make the prices down and, at the same time, increase the product’s quality and services. It is based on how many customers the company has and how much it costs to find another new customer. If the company has many customers, it will be easier to charge higher prices to increase its profit. 

d. Bargaining Power of Suppliers 

It refers to how easily suppliers drive up the cost of inputs for goods and services. It based on how much is the supplier of the inputs of goods and services and how much it costs to switch to another supplier. The supplier could also push the input cost up and get other advantages in trade. However, the company could determine which supplier they would choose by the cost of the inputs. The company could increase its profits while keeping the input cost lower. 

e. Rivalry of Competitors 

If there are many other competitors in the same industry, it will be hard for the company because they may compete by offering the same products and services at a lower price but with the same quality. It will also affect the suppliers and buyers because they will look for a company that could provide a better deal or lower prices of products. So, if the competitive rivalry is low, the company will have much power to charge higher prices and set deals to achieve higher profits. 

Porter’s Five Forces VS SWOT Analysis 

Porter’s Five Forces and SWOT (strengths, weaknesses, opportunities, and threats) are used in the business industry to analyze and make decisions. However, they have a difference. Porter’s Five Forces are used to analyze the company’s competitive advantage. SWOT analysis deeply analyzes a company or organization’s internal potential. So, it based on the need of the company to use one of it. 

Porter’s five forces are still much used in many companies because the company may look beyond their own business and could make long-term plans so that they could stay in the competitive environment. Porter’s five forces have a vital role but should not become the only way to analyze the business strategy. 

To analyze the company’s advantages in competing in the industry, it needs to determine its strengths and weaknesses. They should determine it based on their competitive rivals, the newcomers, and also based on their buyers. If they want to stay in the industry’s competition, they should know everything and decide on an offer based on it. To keep their loyal customers, they should make good decisions so that the customers will not leave them because of other companies that provide better offers. So, the company must do the analysis properly to strengthen its position in the industry. 

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Ardiana Berliani Fajri