May The Forces be With You, Porter’s Five Forces in Finance

The SWOT analysis isn’t the only way to analyze your business and finance. True, you can look at your strengths and turn your weakness into an asset. You can grab every opportunity and neutralize any threat. However, with Porter’s Five Forces, you have a more incisive analysis of your competition. And when you know what and who your competition is, you can use it to gain an edge against competitors. Here we discuss these five forces and how they can help you get a better view of your business. Industry Competition As the name suggests, the first of five is the amount and nature of competition in an industry. When analyzing this force, you must consider the number of existing competitors. Then, see what each of those competitors can do. Think of it as being in a battlefield with soldiers in an all-men-for-themselves battle. Your enemies may be different classes of troops. There may be snipers who don’t run aggressively and prefer to be in the shadows, waiting for the perfect opportunity instead of actively engaging each one. There may be those troops that actively seek competitors to take them down. If you know what each one of your competitors can do, you can use that to counter their attacks. At the same time, it also helps to predict what’s coming for the industry. When competition is tight, advertising and prices could also be tight. And this hurt the business’ performance. Supplier’s Force The force of the suppliers is a force to be reckoned with. Suppliers can have immense leverage and control in a market. This force analyzes that possibility. When a supplier has the greatest share of control in the industry, it can raise its prices with minimal repercussion to its bottom line and the demand for its produces. And when businesses have to pay higher prices for raw materials, their earnings can get smaller. Fewer suppliers mean higher power for each of them. For the businesses, it should be good if there are multiple suppliers from whom they can buy their raw materials. Customer’s Force The customer’s force is like the supplier’s force. But here, the customers have the bigger control. Customers affect the pricing and quality as much as the suppliers. If a company has one group of customers where a huge chunk of their profit comes, that group of customers has a massive control. It can negotiate prices and ask for discounts from companies. This force looks at how important one customer is and how much the company would lose if it loses this customer. For businesses, having more independent and smaller customers is a better setup. It makes it easier for them to charge higher prices to raise profitability. them to charge higher prices to raise profitability. New Entrants New entrants are new competitors trying to get into the fray. This force is about the difficulty of joining a certain industry. Basically, established businesses can weaken if new and improved players can easily get into the same industry as them. So, apart from having an “economic moat” around the business, companies also need to check whether new competitors can arrive one day and take away their position. Among the key barriers to entry in an industry are: Absolute cost advantages Inputs access Economies of scale Brand identity Brand domination With strong barriers to entry in an industry, the better the company’s chances to charge higher prices and negotiate better deals. Substitute Threat The fifth force is about how easily customers can switch from one product to another. A competitor here doesn’t necessarily mean a different brand of the same products. Sometimes, a business creates a different product that answers the same customers’ needs. For instance, the invention of vapes saw smokers switching from cigarettes to vapes. These vapes aren’t a different brand of cigarettes; they a different kind of product that answers to smokers’ needs. The analysis of this force tells the company how the substitute product’s price and quality affect their position in the competition. They will have to study the switching costs for the consumer to determine the next course of action. Using the same example, if the business finds out that customers will likely treat vaping tepidly because of the high price of the gadget and its maintenance, it’s possible that their bottom line will not be totally damaged, as some smokers will stay smoking for the cigarette’s cheaper prices.