Competition analysis that will help you stand out in the market – Porter’s 5 Forces model
Knowing your competition is the foundation of a successful business venture. Whether you’re starting a new company, launching a product in a new market, or have been in the business for years, you should always be up to date with what your competition is doing. This article will show you how to conduct such a step-by-step analysis and what lessons you can learn from it.
Customers are not interested in your services or products? Perhaps your competitors offer the same thing, only better and cheaper, or provide it faster.
Your income doesn’t balance your costs, and you can’t raise the prices? Presumably, for some reason, your competitors have negotiated better contracts and more attractive terms with their suppliers.
And so on, and so forth. We don’t live in void. We are always (indeed perpetually!) exposed to many different forces that decide about “to be or not to be” of our enterprises. As entrepreneurs and managers, we have a responsibility to seek knowledge about these forces and then develop strategies that minimize the risk of failure when the “balance of power” shifts.
And this is not an easy task. Business management is not an exact science, where it is enough to substitute the values into formulae to obtain the answers to our questions. We have to be flexible, determined, and… creative.
Let’s consider the example of the logistics industry – a current Mecca of innovation, where changes force the managers to constantly revise their assumptions, analyze the highly dynamic environment, interpret observed trends and experiment with new solutions. They can either ride the wave of change or, sink being crushed by water pressure or hit by the surfboards of the competition struggling to stay afloat.
I would definitely recommend the first option. In this article, I am going to give you something to get your surf on. Your surfboard is Porter’s 5 forces model.
What is Porter’s 5 Forces Model?
Porter’s 5 forces model is a great tool for analyzing a company’s environment. Developed in the last century by Professor Michael Porter, head of the Institute for Strategy and Competitiveness at Harvard Business School, it is a great starting point for analyzing a company’s environment. If used properly, it allows for a structured reflection on what differentiates a company from its competitors.
Porter’s model includes:
- suppliers’ bargaining power,
- buyers’ bargaining power,
- intra-industry competitiveness,
- threat of new competitors,
- threat of substitutes.
The power of this tool lies in its simplicity and versatility. Nevertheless, I can guarantee that the exercise we are going to make together will provide you with actionable answers and a thorough outline of a strategy to stand out from the competition.
Before you begin…
For the purpose of this text, I assume you are familiar with the Lean Canvas and Business Model Canvas tools (you can read more about them here, here and here. You can also download them from our Library. All you have to do to get access is sign up for the newsletter).
Porter’s 5 Forces Model will support your work with these tools. It will help you better develop the content of columns such as “key partners”, “key activities” and “key resources”. This article will help you determine the key value you want to offer your customers.
The analysis of Porter’s 5 Forces will provide you with a ready-made resource for developing contingency plans. As you probably know, the power of Business Model Canvas is its flexibility, among other things. If the situation evolves and your position changes, your strategy should also be subject to modification.
It pays off to be prepared for this change well in advance. It is worth knowing the areas where the change may occur, and what it will entail.
When should you analyze Porter’s 5 forces and your competitors?
You should analyze the attractiveness of a sector… when you are just launching your business (or introducing major changes to your current operations).
This is a classic situation where Porter’s 5 Forces Model should be applied.
Each model is designed to simplify reality to a certain extent. It is meant to structure your thought process and guide you to specific conclusions.
When starting your business, you probably suffer from some form of decision paralysis due to an overwhelming plethora of hypotheses and unproven information. It may be difficult to focus on the most important elements. Porter’s 5 Forces Model (and therefore this exercise) is designed to help you meet this challenge and guide you through the process of analyzing your competitive environment.
Taking logistics as an example – if warehouse processes automation has been your business so far, but you observe a growing demand for more comprehensive services (which include e.g. automation of notifications sent to package recipients) or a completely new technology – Porter’s 5 Forces Analysis is for you.
When you perform a periodic strategy review
In all Project: People’s articles on the Model Business Canvas, we recommend updating your strategy as often as possible. In many cases, updating this canvas comes naturally as it is impelled by knowledge gained in the course of daily work.
However, once in a while it is worth ” to stand aside” and make a thorough analysis of the competitive environment. At this point, Porter’s 5 Forces model will be exactly what you need.
How to perform Porter’s 5 forces analysis?
This material is more than just an article. It is a holistic exercise. If you treat it as such, you will derive real value from your time spent on reading it. So…
- Carve out time to do this exercise. Don’t let anyone disturb you. Get rid of distractions.
- Download the Porter’s 5 Forces Analysis worksheet from our Lean Library (you’ll get access to it after joining our newsletter). While reading the text, mark all the elements on the sheet (according to your best knowledge or based on your assumptions if it is something you can’t verify).
If there is anything you don’t know – check it.
- Perhaps some of the questions seem trivial to you, and the answers that come to your mind are obvious. Don’t leave it at that. Think of it as a thought experiment and always ask yourself: “Is it really like I think it is? Is there anything that can be done to make it different?”. The goal of this exercise is to generate the ideas that are likely to work for you. Jot them all down – there will be time for evaluation later.
- After completing this exercise, get some rest. Return to the completed worksheet and your notes the next day. Review your notes and make any necessary corrections.
- Transfer your ideas, insights, observations, and plans onto your Business Model Canvas.
Determine the maturity of your sector
Just as you match your attire to the weather, the first step in working on your strategy should be determining the maturity of the sector you operate in. In a sense, sector maturity is like “a season”- each is characterized by certain phenomena with varying degrees of severity, and the actions you should take to minimize their unpleasant consequences (it’s raining and you don’t want to get wet – wear a jacket or take an umbrella; the sun is shining – put on sunglasses and a hat, apply sunscreen; there is a raging storm or hail the size of chicken eggs – don’t leave the house).
Sometimes just knowing what phase your sector is in can be helpful – especially since it’s not always obvious. Therefore, I would recommend that you read the summary description of each of the main stages and see which illustrates your situation best.
The development stages of a sector are determined by technology, social trends, geo-political situation and… many other factors. By reflecting on this, you will come closer to understanding the phenomena affecting your business. It will also help develop a plan to harness the forces that make your business profitable.
A stage characterized by uncertainty and risk. The decisive factors that shape the future of entities operating in the startup phase are technology and innovation (also in terms of business models, i.e. ways of monetizing the business). What we observe here is a very clear experience curve.
This phase continues until the sector either advances to the next stage (of growth or maturity) or… until the investment fund is consumed.
A sector is in the startup phase if:
- there is a low cost of entry, although the capital required to finance operations is unlimited (it is related to the lack of a single, specific vision – the multitude of possible routes of development);
- few competitors are operating in the sector, although it is possible to observe cases of cooperation or deliberate market sharing between competitors – the aim is to minimize the risks associated with market uncertainty;
- prices fluctuate considerably and frequently (the market equilibrium is not yet established, demand and supply are not precisely identified and it is impossible to define the trends);
- the business is unprofitable or on the brink of profitability.
Let us take courier drones as an example. Anna Wanat of lo4.pl aptly asks: is it “still science fiction or already reality?” This question perfectly captures the spirit of many sectors at the startup stage. As Anna writes in her article: “Amazon was the first to announce a plan to use drones, but was forestalled in late September 2020 by DHL when it introduced the drones into its courier service within the frame of a pilot project to transport medicines and other essential goods at certain hours of the day and on weekends to the island of Juist in the North Sea.”
Although still not mature enough and too expensive, this technology is considered an obvious trend by many experts. It forces many logistics companies to invest with no real chance of a return anytime soon.
Once a product has been approved by the market and managed to overcome the initial difficulties typical of innovative projects, it enters the growth phase. And virtually everything develops at this stage: from demand (which most often results from increased awareness of the need that the product satisfies), and increased technological maturity that translates into the value delivered to customers, through profitability, to the number of potential competitors. The trends, however, are still uncertain. Prices and customer behavior are subject to fluctuations that are difficult to predict.
A sector is in a growth phase if:
- the demand is growing rapidly,
- profitability is increasing significantly (in most cases through cost reductions),
- the number of competitors is increasing,
- the price of a product/service is decreasing.
Example? InPost parcel lockers. A service that has revolutionized the online shopping experience for customers. A service that has already earned our trust, which results in an exponential increase in demand with simultaneous price fluctuations. Another argument for mentioning parcel lockers at this point in the lifecycle of the sector is the emergence of other competitive projects by Poczta Polska, Allegro or Alibaba.
The sector has already completed a phase of rapid growth. The development is steady, the prices and trends have stabilized – the sector is in its maturity phase. This is usually the moment when the last “big market players” enter the game – they already have evidence that market demand will guarantee the success of their venture. They know that if they “sleep through” this moment, it will be too late. This is a lesson we can learn from Kodak which persistently ignored the progressing maturity of the digital camera segment.
In mature sectors, marketing and advertising play a very important role. The basic need that provoked the market to create a given sector recedes into the background. The target audience expands and the offer is segmented: manufacturers customize the same/similar product to different audiences.
A sector is in the maturity phase if:
- demand for the product/service is decreasing;
- the competitive struggle is getting tougher while the differences between the offers of particular companies are narrowing;
- the importance of advertising/branding increases – the demand is generated by marketing, not by a need for the product;
- profitability is decreasing.
As they say, there is time for everything. Technology is changing and so is the situation in the world and the habits of society. As a rule, this is a response to the birth of a new segment – just as the emergence of cell phones, and later smartphones, drove the segment of landline phones into “decline”. Before that, landline phones put an end to telegram-related segments. And so on, and so forth. All of this is reflected in the market.
A sector is in shakeout phase if:
- there is a noticeable stagnation and a definite decline in demand for the product/service;
- more companies withdraw from the sector due to difficulties in maintaining profitability at the appropriate level;
- market trends are not optimistic;
- opportunities for product/service development are limited by external factors;
- the market share of individual companies does not change.
A sector in the shakeout phase can move into a startup or growth phase if any of the negative market trends are reversed (such a phenomenon is occurring in the music industry, where vinyl records or cassettes are now experiencing a real revival).
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