Industries don’t stay the same for long. So how do you analyze your industry when it’s constantly changing? It helps to have a framework.
According to Harvard University professor Dr. Michael Porter, there are five main forces that determine competitive intensity and overall industry profitability. Here’s Porter’s 5 Forces Model. Apply it to your small business’ industry and you should gain a clearer picture of what’s going on.
1) Intensity of Competitive Rivalry
This refers to direct competition between companies in the same industry, and degree of aggressiveness of rivals.
2) Threat of Entry of New Competitors
New companies often enter the market that compete with existing companies. How do they change or impact the industry?
3) Threat of Substitutes
This is the existence of companies offering products or services that may be substituted for your product or service. This can also include the customer’s ability to switch to alternatives.
4) Bargaining Power of Suppliers
Suppliers of raw materials, components, labour and services can hold significant power if the resources they provide are unique or scarce, or if there are only a few suppliers.
5) Bargaining Power of Customers
This includes the power that customers hold — including the ability to put a business under pressure — and the effect of customer sensitivity to price changes.