In business, your ability to make a good profit is dependent on your position within the market. As an example, do you have competitors offering similar products; is it easy for people to enter a market when they see you are making a profit? Can customers bully you into lowering your prices? If you don't think about your position in the market, it is very easy to spend a great amount of time and yet still struggle to stay ahead.
This is where a tool like Porters Five forces can be used in your business. The tool was created to help us understand who has the most power in a market situation and was developed by Michael Porter in reaction to the SWOT analysis, which he considered un-rigorous and ad hoc. The tool can also illuminate whether a product or service is likely to be profitable in a given market. Much like the SWOT analysis presented previously, this tool helps to illuminate market dynamics which provide a robust foundation to your organizations VoC initiative. By understanding these forces, you will be in a better position to understand the VoC information you gather as well as how to leverage it to a more successful product.
The tool assumes there are five forces determining market power. Porter defined the five forces as:
Any of these forces can work for you or against you in the market. To use Porters Five forces tool, you should look at each of the variables individually and then weigh the relative advantage/disadvantage of entering this market with your product or service. We will explain how to use Porter's five forces as part of the market requirements document we present in Chapter 9, Completing the Circle – Using the Customers Voice in Your Organization.
Supplier Power—this is a basic assessment on how easy it is for suppliers to drive up prices on the goods and services you need for your product, or reduce quantity supplied. Suppliers of raw materials, services, and labor can have power over a firm when there are is lack of alternative suppliers or substitutes, or when the cost of switching from one supplier to another is high. The fewer the supplier choices you have and the more you need the suppliers, the more powerful they are.
Factors contributing to supplier power:
Buyer Power—Conversely, this is an evaluation of how easy it is for buyers to drive the prices down (and reduce your margins). Buyer power grows when they become more concentrated or organized, when the product is undifferentiated, or when switching costs are low. If you deal with a few, powerful buyers who also have access to alternatives, they are often able to dictate terms to you.
Factors contributing to buyer power:
Competitive rivalry—this is an evaluation of the number and capabilities of your competition. For most industries, the intensity of competitive rivalry is the major determinant of the competiveness of the market. If you have many competitors and they offer equally functional products and services, you will likely have little power as the suppliers and customers will go elsewhere if they do not get a good deal from you. It is even more unattractive if the market is stable or declining, exit barriers are high, or competitors have high stakes in staying in the segment. Conversely, if no one else can do what you do or offer the products you offer, then you can have much higher power.
Factors contributing to competitive rivalry:
Threat of substitutions—This is affected by the capabilities of your buyers to find a different way to achieve their goal without using a product like yours. Substitutes impart limits on prices and profitability. If technology advances, prices and profits in these industries are likely to fall. As an example, if you were a low priced camera manufacturer or a handheld calculator vendor, you have probably seen your market evaporate as more and more customers use their phones for basic picture taking and calculations. If substitution is easy and viable, then this weakens your power.
Factors contributing to threat of substitution:
Threat of new entry—Profitable markets with attractive yields will attract new players. Power is also affected by the ability of new competitors to enter your market as more entrants typically reduce profitability for incumbent firms in the industry. If it costs little in time or money to enter the market, if there are few economies of scale or if you have little intellectual property protection, then new competitors can enter your market and weaken your position. If there are strong barriers to entry, your position can be upheld.
Factors contributing to threat of substitution:
These forces can be put into a diagram like the following one to analyze your situation. Use this as a template to evaluate and brainstorm the relevant factors for your market or product. It is also recommended that you summarize the scale and force on the diagram in the accompanying circle using:
The five forces framework has been challenged by some and adaptations and modifications have been suggested by others by adding forces such as innovation, complementary products and services, and government. However, it can be argued that these other factors only serve to influence the original five and this should be adequate for most analysis.
Once you've completed a five forces analysis, you will see clearly where you are at risk so you can take steps to overcome those risks and if you are looking to enter a new market, you can see at a glance how potentially attractive it will be for your organization.
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