Sunday, September 13, 2020

What are Porters 5 Forces and are They Still Important?

As well as working in digital marketing for many years, I've often operated within a traditional marketing framework. When creating strategy or insight for a new company, part of my remit has sometimes been to identify their strengths and weaknesses in their chosen marketplace. This is part of the process where we create brand voices, brand personas, etc., and is a part of the overall marketing process often missed in digital marketing.

Luckily I'm old, and this is what we used to do "back in my day" that's still (of some/limited) value today, all be it a very general analytical framework suitable only to gather the basics about a company and its market position.

Please also read the end of this post. This method has its limitations and is really just a beginning to look for better understanding, rather than a solid framework for success.

So, what are Porters Five Forces?

This is a tool invented by a chap called Micheal Eugene Porter back in 1999 (at Harvard Business School) in order to create a framework for business analysis (and us marketing types) to document and evaluate the competitive strengths and weaknesses of a company in any given marketplace. It helps to recognise your USPs and your possible profitability - so gives your positive (and negative, in relation to your competitors) talking points in relation to any content marketing you might undertake.

Understanding 'Porters Five Forces Analysis'.

Most businesses keep a close eye on their competition, and while this is one element there's far more to a business strategy than just doing things better (or differently) to your nearest rival. Mr Porter identifies 5 specific forces at work against sales or recognition in a competitive environment. These are:

1. Competition.
"A monopoly renders people complacent and satisfied with mediocrity.”
This is the first and most obvious of Porters 5. In short, who (if anyone) can undercut you or offer a better service to the same target audience? The more competitors, plus the equivalent number of products or services they offer, the weaker your business position. Factors such as geography and standard segmentation elements also play a part in this. Potential clients and suppliers will always look for a company offering a better service at a reduced cost.

Naturally, if competitive opposition is low, businesses have more leverage to charge higher prices and set the terms to reach healthier sales and turn a better profit.

2. Supplier Power.
Change is inevitable, but everybody resists change.
The fewer suppliers of product (or service) elements, the greater pricing power they have over their customers (you). Do you have exclusivity in supply? Just how much DO you depend on your current suppliers? Can you source your componentry or raw elements elsewhere? Sometimes profits end up being diverted to suppliers rather than the end businesses.

Remember in the 90s when Microsoft surpassed IBM when they licenced MS-DOS and IBM lost the PC market? It pays to buy your suppliers a bottle of Johnny Walker and to send them a card at Christmas.

3. Customer Power.
"This job would be great if it wasn't for the f***ing customers."
How many buyers do you have and how much would it cost you to find a new one? This is – essentially – the crux of customer power. Some businesses have a small but dedicated user base (like our local butcher) while some have a broader but more fickle clientele (like Tescos). A tighter and more influential customer base means each client has more authority to negotiate for lower prices and better deals, just through their footfall or purchase power. A business that has numerous, smaller, independent customers has a simpler time charging higher prices to boost profitability.

4. The Threat of Substitution.
Coke came before Pepsi, but only just.
What’s the likelihood of your clients finding a new way to do or source what you offer them? As an example, can your customers substitute your piece of accounting software by doing the work manually or by paying someone else to do it at a lesser price? A cheaper or easier substitution could be a killer for your profitability or market position.

5. The Threat of New Entry.
"Here come the Belgians, and they're playing their Joker."
Existing business in areas that have high barriers to entry – which could be through the likes of legal requirements, expensive start-up or running costs, mad brand loyalty (I only buy Apple), protected copyright elements, specific geographical hurdles (like platinum mining), the economics of scale (we’re bigger than they are) etc. - have a lot less competition than businesses that have lower barriers.

Pharmaceutical companies, for example, have patents on certain drugs. Oil and gas exploration needs serious capital to let businesses spread the risks of an unsuccessful drilling venture across lots of potential land leases.

Some Limitations of Porters Five Forces.

Easy enough, but this is only really useful - and this is worth remembering - for short term strategy. 

Nowadays the world moves a damn site faster than it did in Mr Porter's day. Rapidly changing technology and globalisation means your data can go out of date pretty damn quick. After all, it only takes one pandemic, a new device (see iPhone), a rapid-response marketing platform (social advertising) or fast-evolving trend to blow EVERYTHING out of the water. Great for the short term. Not so good for the long. Revisit your 5 forces analysis often or if you see any major or possibly disruptive change (all your customers just moved to a new social platform!?) in any of the elements above.

Porters Five Forces also has its limitations for businesses that cross into more than one industry and/or have wildly different product ranges. One size does not fit all. Apple and Cannon are competitors when it comes to cameras, for example, but not in other areas. Apple doesn't make printers and Cannon don't make smartphones.

This framework doesn’t work for not-for-profits, obviously, where making money for direct gain isn’t a prime consideration.

The Five Forces model really serves best as a starting point for a further examination of a business’s strengths and vulnerabilities, but it is at least a simple start. It also acts as a catalyst for ideas and messaging. Examining competitors, for example, can highlight competitor weaknesses against your strengths –  “We pride ourselves on our customer support”, for example, when a competitors clients are complaining about their poor helpdesk response or their returns policy.

Use it, by all means, but review it often and be aware that Porters Five Forces is a starting point and not an answer. It's dated, like me, but it's solid if you keep in mind its limitations.

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