What are Porter's 5 forces?
Porter argues that you need to focus on five essential elements: customers, suppliers, substitute products, potential competitors, and existing competition. To learn how to use the model, we'll look at each of these parameters and how to put them into practice, with well-known examples to make them easier to understand.
Customers
You can analyze this point from many different angles, but the most important thing is to understand your customers' loyalty and buying patterns: volume, frequency, quantity, type of purchase, profile, age, origin, etc. In other words, analyzing your customers, their loyalty, and their reasons for buying will tell you whether you're doing things right and should stay the course or, on the contrary, whether you need to make changes to win customers. Above all, you need to answer the following questions: Who buys your product? How often do they buy it? And why?
Globally, the brand with the highest loyalty is Amazon, according to Brand Keys. The reasons have to do with its good service, fast shipping, and the variety of its marketplace. In second place is Apple, a company that has managed to build an ecosystem of connected devices that make the user experience easier and better.
Suppliers
Analyzing suppliers means looking at how concentrated they are in the market, the bargaining power you have over them, your dependency on them, and their cost compared with other suppliers.
A real-world example is semiconductor company TSMC, the main supplier to Apple and Nvidia. These two tech giants are nonetheless highly dependent on the Taiwanese company, which also operates in a market with very high barriers to entry, giving it significant bargaining leverage over its customers.
Barriers to entry in a market can include economies of scale, product differentiation, capital requirements, regulations and licenses, access to distribution channels, network effects, and cost and experience advantages. These make it harder for new players to enter and affect competition in the market. That's why it's very important to analyze each of these points under new competitors.
Substitute products
The next three points, or forces, focus on the competition, or external analysis. Substitute products are a key part of analyzing new market trends. Tracking them can give us time to rethink the company's strategy and adapt to customers' new demands or even try launching new products to replace the ones we've been producing so far.
Here, it's also essential to talk about the competitive advantages a product has over the rest and why it has them, whether due to price, proximity, where it operates, its power over suppliers, its distribution network, etc. At the same time, with substitute products you also need to ask about their availability, their value for money, and whether they offer added value that we don't.
A clear example of this can be seen in today's automotive sector. Until recently, Tesla was the world's leading seller of electric vehicles, but China's BYD has taken its spot. The reason lies precisely in the substitute product. BYD makes cheaper cars of similar quality, and it also benefits from having the entire EV battery manufacturing and distribution network in China.
New competitors
When it comes to new competitors, the point isn't to analyze the new companies in the sector, even though it may seem that way. Instead, it's to revisit the barriers to entry in the industry we operate in, the costs of starting a business like ours, and the legislation. The more expensive and difficult it is to operate in a sector, the harder it will be for new rivals to enter.
In other words, it's less about analyzing what new companies are doing and more about how easy or hard it is for them to get established and grow their business. That way, you can prepare the company for stable, variable, or increasing competition.
With new competitors, the first step is to determine whether you're in an open sector or one that's hard to enter. For example, in Spain, new competitors have only been allowed onto the rail network for the past two years; it used to be a state-controlled sector. Other sectors, such as food and beverages, show more movement. A clear example is how Monster has become the leader in energy drinks, unseating the iconic Red Bull.
Existing competition
The last of Porter's 5 forces focuses exclusively on competitor analysis. Here, it's essential to ask what your competitors are doing, which products work best for them, which work better, which market they're focused on, who their real audience is, how they price their products, which marketing strategies they're following, what new products they're launching, etc.
The questions you ask to analyze the competition should focus on their products, how they differ from yours, what they're doing well and what they're doing badly, how easily they can cut prices, what strategy they're following... The idea is to get a clear picture of how they're run and where they stand in the market, so you can draw conclusions, improve, and get ahead of them by learning from their successes and mistakes.
For a real-world example of analyzing existing competition, look at social media and how Instagram, TikTok, YouTube, and Twitter compete constantly, rolling out new features every few weeks or months to stay ahead of each other and have the most active users.
In short, Porter's 5 forces should help us analyze the company and its market position in greater detail. By following the guidelines we've covered, we can identify what we're doing right and wrong, make the most of both to grow the company, and always stay alert to what our competitors are doing.
