Porter’s Five Forces is also called Porter’s Competitiveness Analysis. This concept comes from Michael E. Porter’s publication “Competitive Strategy: Techniques for Analyzing Industries and Competitors” in 1979. It provides corporate managers with ideas for analyzing the industries and is regarded as a benchmark for competitive and position analysis.
Michael E. Porter became a professor at Harvard Business School at the age of 26, making him the youngest professor in Harvard history. He once served as a member of the Reagan Administration’s “Commission on Industrial Competitiveness” and a senior strategic advisor to the Boston Red Sox.
Porter’s Five Forces is a business framework that provides qualitative assessment and develops business strategies. It mainly analyzes five types of factors that may generate competitive influences in the industry:
1. Competition in the industry
Assess the degree of competition among the existing competitors in the industry, including the number of competitors, industry growth rate and differentiation strategies
2. Potential of new entrants into the industry
Assess the ease of entry for new competitors, including the capital requirements, economies of scale and government regulations
3. Power of suppliers
Evaluate a supplier’s ability to influence price and terms based on factors including supplier concentration, uniqueness, and availability of substitutes
4. Power of customers
The influence of buyers or customers in determining prices and terms, factors including the number of buyers, information circulation and switching costs, etc.
5. Threat of substitute products
Consider substitute products or services in the market, including the quality, price, and ease of switching.
Porter’s Five Forces is a theoretical analyzing tool with certain limitations and is based on three assumptions: management can obtain the information of the entire industry; there is only competition and no cooperation between the companies; the scale of the industry is fixed.
I believe that business owners can make good use of Porter’s five forces analysis to stand out in the market, also to enhance their market position and competitive strength. Here I use Apple Inc. as an example.
Case Study: Apple Inc.
Apple Inc.’s current business covers product design, development and electronic payment, smartphones, computer software, online services and personal computers.
Competition in the industry
Early advantages lay in patents, intellectual property rights, and Steve Jobs’ unique leadership style and product vision. But later, Samsung, LG, Google, Huawei, Amazon, etc. all actively developed technical ability and continued to advance in publicity. Product differentiation and user experience are not obvious. Currently, Android and iOS devices are quite similar in terms of app functions, making the switching cost for users very low. Coupled with information transparency, customers can easily switch brands based on price and functionality.
Potential of new entrants into the industry
The current market competition is very severe. New entrants need to spend huge amounts of money to establish brand awareness, basic construction costs for multinational operations, product R&D and manufacturing, and supply chain deployment, and then start talking about sales and profits, which is very difficult. Currently, new brands include Huawei, Xiaomi, Lenovo, etc., and they are gradually occupying a specific market (affordable mobile phones).
The threat from those new brands to Apple Inc. is relatively low, because its own brand value has outweighed the impact of price, and it does not target the low-price mobile phone market. Apple Inc.’s brand loyalty is quite high.
Power of suppliers
With the scale of the global supply chain, Apple Inc. is able to select suppliers all over the world. Some suppliers with special patent rights have a negotiating advantage. Other suppliers (such as semiconductors, CPUs, lenses, casings, and packaging) are available all over the world. There is ample supply available. Apple Inc.’s switching costs among suppliers are very low, and most suppliers are unwilling to take any risk of losing a large customer and weakening the supplier’s bargaining power.
Power of customers
Apple Inc. has successfully built a large group of loyal followers. In an environment where information is transparent and spreads rapidly, collective consumer awareness becomes more influential. By continuing to develop novel products such as Airpods and Apple Watch, it strives to maintain important brand loyalty and collective consumer awareness.
Threat of substitute products
Due to technological innovation, electronics products evolve rapidly, and current Apple Inc. mobile phone products can quickly keep up with the functions of substitutes by using continuously upgraded apps. Apple Inc. mobile phone is a multi-functional complex. When consumers switch to alternatives, they will not only consider a single function. Therefore, compared with the comprehensive functions of Apple mobile phones, the functions of most alternative products are slightly inferior.