Researching Your Competitive Marketplace to Gain Advantage
By Using Porter’s 5 Forces
The small business arena has been in flux for well over a year due to the COVID-19 pandemic. Huge shortages of products during the early stages and the reluctance of consumers to go out in public. Many resilient entrepreneurs during the pandemic have become creative in offering deliveries, outside dining, and revamping their inventories. In this new streamlined economy, small businesses must keep adapting to the changes that are inevitably coming.
A great analyzing tool is “Porter’s 5 Forces” which is a model developed by Michael Porter of the Harvard School of Business. It looks at five competitive market elements of your business allowing you to fine-tune operational strategies.
When developing your strategy using these five strategies conceived by Professor Porter the small business owner can develop a superior competitive strategy.
Porter’s 5 Forces
Suppliers Bargaining PowerThe characteristics of your supply chain are a big factor in the amount of control that the suppliers have over buyers. The fewer suppliers the greater control they have over the pricing and distribution of products. When many suppliers are offering the same type of products and costs for changing to a competing supplier are low, a company can increase its profits by switching vendors.
Buyers Bargaining Power
When buyers’ Bargaining power is high they have numerous buying options. If there are choices limited they have limited power. When a competitor can supply a product that is identical or a substitute for an existing one at a lower price the buyer has a choice.
Substitute Threats
During the current pandemic, the supply chain was unable to keep up with demand. As we all remember many products were not available and substitutions became a standard practice. Some of those substitutions proved to be better than the ones we were used to purchasing.
Industry Competitors Rivalry
If a product is generic and there are many competitors in the marketplace each supplier has to determine what makes their product appeal to customers. Knowing what customer base you are targeting will give you an edge. Quality, low price, distribution method, and services offered are factors to consider. When competing with a large corporation that has a competitive advantage a small company should offer boutique products that the larger firms are ignoring. An example is the proliferation of craft breweries.
New Entrants Threat
Barriers to entering a new venture can be high or low depending on the type of organizations are currently holding the dominant market shares. Porter states that economies of scale are an advantage to large enterprises due to their ability to produce on a large scale reducing the cost per unit.
Capital requirements are a factor in the new entry of competitors entering the marketplace. Production of custom products on a small scale using new technology such as 3D printers creates a niche for small producers. They can advertise through social media and distribute through online vendors. There is usually little threat of retaliation by large producers since these are low production items.
If businesses periodically review Porter’s 5 forces and adjusting their strategies to the changing economic conditions, they will have a competitive advantage over their rivals.
Citation
Porter, Michael E. “The Five Competitive Forces That Shape Strategy.” Special Issue on HBS Centennial. Harvard Business Review 86, no. 1 (January 2008): 78–93.
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