Porter's Five Forces: How to identiy attractive markets

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Some markets are
more attractive than
others…
…but how do you tell
them apart?


Leave it to gut feel?


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Get stuck in to some
analysis?

Whether you are…
 Working on a plan for a new
business
 Contemplating the launch of a
new product
 Reviewing the strength of your
own marketplace


…Porter’s Five Forces model can help
you understand your situation.

This model was developed more than
30 years ago by Michael Porter, a
Harvard academic. However, it
remains as relevant today as it was
when it was developed.


Porter’s Five Forces model
Threat of new entrant

Supplier Competitive Buyer
power rivalry power

Threat of substitutes

Let’s take each of the five elements…

How much power is held by the customer?
 How many customers are there and how
buyer many customers does a typical player
power have?
 How much market share do the largest
customers account for?
 What alternatives do customers have?



How much power do suppliers hold?
 How many suppliers are there and what
market share do the largest suppliers hold?
supplier
power  How distinctive are each supplier’s
products?
 How straightforward is it for the customer
to switch to another supplier?



How much competition is there in the market?
 How many competitors are there?
competitive  How much market share does each
rivalry competitor hold and how strong are
competitor brands?
 How easy is it to win new customers?



How likely is it that competition will increase
with new entrants?
threat of  What are the barriers to entry? Knowledge,
new technology, distribution network, brand?
entrants  How much would it cost a new entrant to
enter market and how quickly would this
investment pay back?



What is threat that customers will switch to
different products?
threat of  What are substitute products and how
substitutes effective are they?
 How straightforward is it for customers to
switch products?


Now, let’s look at an example…

Mike, an entrepreneur, is thinking about
launching a new bottled water company. Is it a
clear good move?
water
He uses Porter’s Five Forces model to structure
some analysis.



BUYER POWER:
First, Mike identifies the buyer. In this case, not
clear the ultimate drinker, but the retailer.
water He finds that in his home country, 80% of sales
by value are through one of four supermarket
chains. The remaining 20% of sales are through
hundreds of independent outlets. The buyer
power is therefore STRONG.



SUPPLIER POWER:
Mike’s suppliers would include his workers, plastic
clear bottle manufacturer and transport company. As a
water small operator, Mike quickly realises that he is
likely to have little power with most suppliers, all
of which are part of multinational companies.
However, he could achieve strong power over his
workers by choosing a location where
unemployment is high.



COMPETITIVE RIVALRY:
The bottled water market is very competitive, with
clear more than 30 suppliers in the UK alone. Mike finds
water that 60% of the market is held by the three
largest companies. However he also finds that the
big retailers will stock smaller suppliers. The
nature of the product means that consumers will
switch very easily. Rivalry is therefore HIGH.



THREAT OF NEW ENTRANTS:
The level of competition suggests entry is
clear relatively easy. However the launch costs are
water relatively high and suppliers need to find a spring
source for the product. The threat is currently
HIGH but could lessen as sources are claimed.



THREAT OF SUBSTITUTES:
Mike does a study of supermarket shelves and
clear finds that the average store selling 500ml bottles
water of water sells 25 other drinks of a similar size
that could substitute for water. This is higher than
Mike realised. Water is by far the cheaper option,
but some extra research shows that shoppers
frequently substitute other drinks for water.
Threat is HIGH.


So, what did Mike learn?

This analysis highlights for Mike what a tough job
he is going to have making his company a
clear success. He could find it difficult getting his
water product into big stores and, when he does,
shoppers may readily choose to buy other drinks
instead. If he does go ahead, Mike now realises
that if he chooses his location carefully he can
minimise wage costs.


What now?
Mike’s analysis prompts a series of questions:
 Why am I well placed to launch a water
brand?
clear  Would it be more beneficial to act as a
water supplier to or buyer from water companies?
(eg open a retail chain)
 How fragile is the market lead enjoyed by the
largest water companies?
The answer to these questions will determine
what Mike does next.


What now?

Learn more about Porter’s Five Forces here.

We have more information on this and other strategy tools and
themes at strategywrap.com. Why not take a look today?

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