Looking at the market

How can you tell if a market is attractive to operate in?

Ultimately, you want to understand how competitive the market is, whether there are opportunities available, and what threats you might face. You can do this using Porter’s Five Forces.

This framework helps understand market competitiveness and identify potential business pressures. This allows organisations to address change in the operation environment and avoid potential business problems.

With this method, four forces – the bargaining power of customers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products – combine with other variables to influence a fifth force, the level of competition or rivalry in an industry (Figure 1). It’s usually applied to a suite of products or services an organisation offers.

 

Figure 1: Porter’s Five Forces

Before you begin considering this model, you need to determine the domain the organisation operates in. This may seem simple, but it can affect what your analysis reveals.

Reflection: Determining the business domain

Consider the example of a video game console manufacturer. What domain would they operate in? Reflect on these questions:

• Are other console manufacturers the only competitors?
• Does the operating domain cover all products that can be used for entertainment, such as TVs and other electronic devices?
• Would manufacturers of traditional board games be considered as competitors?

Applying Porter’s Five Forces

Once you have determined the business domain that the organisation operates in, you can begin examining each of the Five Forces. This will identify competitive forces in that domain, which may be positive or negative, and represent threats and opportunities.

Cadle, J. et al (p.33, Business Analysis Techniques 3rd ed., 2021, BCS) list the following questions which you can use to guide your analysis for each force:

The threat of new entrants

• Are there barriers to entry, such as the need for large amounts of money or expertise? 
• Is it possible to start up an organisation offering these products or services without much financial support? 
• What is the likelihood of new entrants coming into the industry?

The bargaining power of suppliers

• How many suppliers are available?
• Is this a competitive situation where the organisation has a choice of suppliers?
• Do the suppliers have the power in the relationship because they operate in an area of limited supply?

The bargaining power of buyers

• How much choice do buyers have? 
• Can they switch suppliers easily? 
• Do they have the power in the relationship or are they locked into the supplier?

The threat of substitute products or services

• What is the range of substitutes available? 
• What is the position of the organisation when compared to the suppliers of these substitutes?

Industry competitors

• What is the level of competition for the products or services in this industry?
• Is the organisation in a good competitive position or is it a minor player?
• Are there several competitors that hold the power in the industry?

Porter’s Five Forces in practice

Returning to the example of a car dealership, here’s what a simple analysis using Porter’s Five Forces might provide (Figure 2):

Figure 2: An analysis of a car dealership using Porter’s Five Forces

Reflection: What insights does the analysis provide?

Using the example above, what conclusions can you draw – how might it influence the decisions the car dealership makes? Scroll down to find out.

 

Threat of new entrants

Internet-based car supermarkets do not have high set-up or premises costs.

Bargaining power of suppliers – high

If the manufacturer withdrew the franchise, there would be significant rebranding and staff training costs.

Bargaining power of customers – high

Customers can shop around and demand bigger discounts.

Threat of substitute products

Increasing fuel costs are leading to drivers looking for alternatives to driving to work (e.g., home working, public transport, bicycle hire).

Industry competitors

There are many different manufacturers and dealers, and it is easy for customers to switch to another.

Reflection: Your experience

Think of an industry that you’ve worked in or are familiar. What insights would you get from Porter’s Five Forces?

When you’re ready, select Next to continue.