How to Gain Competitive Advantage and Profitability: Porter’s Five Forces

The marketing plan is a living document that changes constantly in order to gain Competitive Advantage and Profitability.  Equally important are the uses of multiple analysis tools to create a three dimensional understanding of where your organization is positioned relative to the market as a whole, and your competitors.  One such tool is Porter’s five forces.

In order to gain Competitive Advantage and Profitability you must first understand where your organization is positioned within your market.  Almost everyone has heard of the SWOT or TOWS analysis, they are good tools.  However, they are only a few dimensions used in evaluating key marketing factors.

The market is a multiple dimensional, constantly evolving space.  Competitors are moving within your industry and are constantly re-positioning themselves, and their products, to compete more aggressively.

Porter’s Five Forces is an essential marketing analysis instrument used to guide strategic marketing development. We, at EZB Consulting, use it to analyze the state of competition in an industry, to find out why some firms and industries are more profitable than others, and to discover the sources of profitability. We also use it to gain insight into the profit potential or desirability of a market and gain an understanding of the structural features of a market. We also use it, as well as other tools, to optimize the features that set the stage for firm behavior and influence the profitability of all firms in your market.

The five forces Studied are:

Entry Barriers:  Factors that restrict the ability of new competitors to enter and begin operating in a given industry

Supplier Power:  Pressure that suppliers can place on an industry

Buyer Power:  Pressure that buyers or customers can place on an industry

Internal Rivalry:  Competition for share by firms within a market

Substitutes:  Customer tendency to select alternate products or services

The Individual status of each force, weaker or stronger, show the opportunity for higher profits or limitation of opportunity respectively.

We assess each of the five forces to answer specific questions:

1. How much of a threat?
2. Does it pose a threat and why?
3. How can we reduce the threat?

The weaker the five forces are, collectively, the greater the opportunity for higher profits and/or performance; reciprocally the stronger the forces, the more limited the opportunities.

When using the Five Forces framework, we try to determine which forces pose the greatest threats. Ask why a given force is problematic or not. For instance, is there vicious competition because all products or services are similar and there really is no differentiation?  We also note which of the forces can be manipulated and which cannot. For example, in some cases there may be little that can be done about your ability to control supplier power, suggesting that you should focus your energies elsewhere.

We use the Five Forces structure to answer strategic questions:

1. stresses about opportunities and threats inherent in the market environment
2. determine optimal positioning of an organization in its industry
3. learn where strategic changes may have the most impact on firm profitability and performance,
4. discover industry trends that may be opportunities or threats, and
5. find potentially profitable new products or markets to create differentiation.