Evaluating Unfamiliar and New Opportunities with Porter's Five Forces

When faced with the task of evaluating a new opportunity, especially in an unfamiliar industry, it can be challenging to know where to start. One effective approach is to consult Porter's Five Forces model, a robust framework designed to help businesses understand the competitive landscape.

Understanding Porter's Five Forces Model

Porter's Five Forces model, developed by Professor Michael Porter, a renowned economist and business strategist, is an invaluable tool for predicting competitive responses and assessing industry dynamics. The model examines five key forces that shape every industry and market:

1. Threat of New Entrants: This force analyses how easy or difficult it is for new competitors to enter the industry. High barriers to entry can protect existing companies from new competitors, while low barriers can increase competition.

2. Bargaining Power of Buyers: This force looks at the power customers have to drive prices down. When buyers have many choices, their power increases, which can pressure companies to lower prices or improve quality.

3. Bargaining Power of Suppliers: This force examines how much power suppliers have over the price of goods and services. If there are few suppliers or if they offer unique products, they can demand higher prices, affecting the profitability of companies in the industry.

4. Threat of Substitute Products or Services: This force considers the likelihood of customers finding a different way of doing what you do. If substitutes are readily available and affordable, this can limit the potential of an industry.

5. Industry Rivalry: This force analyses the intensity of competition among existing competitors. High rivalry can result from numerous competitors, slow industry growth, or high exit barriers, leading to price wars and reduced profitability.

Applying Porter's Five Forces Model

To effectively apply Porter's Five Forces model, businesses need to conduct a detailed analysis of each force and understand how they interrelate. For example, in a scenario where the bargaining power of buyers is high, a manufacturer might face increased risk as buyers could pressure for lower prices due to the availability of alternative suppliers. This realisation could prompt the manufacturer to diversify their business areas to mitigate reliance on segments with limited power.

While Porter's Five Forces model is a powerful tool for understanding industry competitiveness, it is not without its limitations. For instance, the Jobs to be Done theory suggests that people don't merely buy products; they hire them to help make progress on specific tasks in their lives. This perspective shifts the focus from the product itself to how well it performs the job. For example, in the aviation industry, traditional analysis might focus on planes, but customers might choose to drive, take a train, or visit a local lodge instead of flying. Thus, competition extends beyond the industry to the broader arena of customer needs and solutions.

 Porter's Five Forces model provides a comprehensive framework for evaluating new opportunities in unfamiliar industries. By understanding and analysing these forces, businesses can gain valuable insights into their competitive environment and make informed strategic decisions. However, it is essential to complement this analysis with other perspectives, such as the Jobs to be Done theory, to fully grasp the complexities of market competition.