In the process of strategic planning, one of the biggest issues is competition. Who is your competition? How are their actions in the marketplace going to affect your bottom line and future planning? How do you rank or evaluate competition? The answer to those questions obviously is that you have to analyze competition, and one way to do that is by using Porter's Five Forces Model. Originally, this was developed by the Harvard Business School Professor, Michael E. Porter, in 1979. The Five Forces Model looks at five specific factors that help determine whether or not a business can be profitable based upon other businesses and players in the industry. Porter regarded understanding both the competitive forces and the overall industry structure is crucial for effective strategic decision making. In Porter's model, the five forces that shape industry competition are as follows. Number one, competitive rivalry force. This force considers how intense competition currently is in the marketplace, which is determined by the number of existing competitors and what each is capable of doing. Competition is considered high when there are just a few businesses equally selling a product or service when the industry is growing and when customers can easily switch from to a competitor's offering for little cost. When rivalry competition is high, advertising and price wars can ensue, which can also hurt a business's bottom line. The next factor is the bargaining power of customers. Now, this force considers the other side of the equation, and that is customers. Customer power looks at the power of the consumer to affect pricing and quality. Consumers have power when there aren't many of them, but there are lots of sellers, as well as when it's easy to switch from one business's products or services to another. Buying power is low when consumers purchase products in small amounts and the sellers product is very different than any of its competition. So, the next force is the bargaining power of suppliers. Now, another factor is suppliers, and supply power analyzes how much power a business's supplier has and how much control it has over the potential to raise its prices, which in turn would lower a business's profitability. In addition, this looks at the number of suppliers that are available. The fewer there are, the more power they have. Businesses are in a better position when there are a multitude of suppliers. The next power is the threat of new entrants, and this force examines how easy or difficult it is for competitions to join the marketplace in the industry being examined. The easier it is for a competitor to join the marketplace, the greater the risk of a business's market share being depleted. Just to illustrate, consider computer operating systems. Right now, in the consumer market, there are basically three: Microsoft, Apple iOS, and at least at the high end of things, Unix. Just three. How easy would it be for another company to jump into this market? I'd say, it's pretty darn hard. Barriers to entry include absolute cost advantages, access to inputs, economies of scale in well-recognized brands. The last power is the threat of substitute products or services. Substitute products are those that are not direct competitors, but when pressed, could provide the same utility. For example, consider automobiles. Substitutes for automobiles would include buses, trains, bicycles, even walking. The threat of substitute products study is how easy it is for consumers to switch from a business's product or service to that of a substitute. It looks at how many competitors there are, how their price and quality compare to the businesses being examined, and how much of a profit those competitors are earning which would determine if they can lower their costs even more. The threat of substitutes are informed by switching costs, both immediate and long-term, as well as a buyer's inclination to change. So, there you have it. That's Porter's Five Forces Model, and it is bedrock to strategic planning. So, how does this apply to sales in sales management?
