Porter’s 5 Forces model depicts existing competition and the prospects for new competitors. Originally published in 1979 and recently updated by the Harvard Business Review, the model accurately depicted strategic thinking at that time and encouraged businesses to think beyond their existing competitors to anticipate competition from new entrants. The model also shows how a business’s competition is much broader than a cursory glance might suggest. Understanding and gauging the threat posed by a broad swath of competitors is critical for long-term success.
Porter’s 5 Forces model
The notion of competition is somewhat gnarly. It’s important to identify those businesses competing with your own so you can build a strategy that attracts consumers to your business. We often talk about a value proposition or unique selling proposition (USP) as reflecting your strategic advantage over your competition. Your USP gives your target market a reason to choose you over another option.
Commonly, businesses think of competitors as businesses that provide the same product they offer. If you’re a restaurant in DC, you consider your competitors as other restaurants in DC or those nearby. Some businesses further limit competition to only restaurants serving the same type of menu, such as Mexican restaurants that only view other Mexican restaurants as competitors. Some only consider restaurants in the same neighborhood or those in the same market, such as quick-serve restaurants. Porter’s 5 Forces model questions the wisdom of making such narrow assumptions when it comes to identifying your competition.
When you understand the forces affecting your industry, you’ll be able to adjust your strategy, boost your profitability, and stay ahead of the competition. For example, you could take fair advantage of a strong position or improve a weak one, and avoid taking wrong steps in the future. [source]
To adequately assess your competition, you must understand how consumers, especially your target market, see you and other options. After all, it doesn’t really matter that you think your brand is far superior to those offered by your competition. It only matters what consumers think. I always emphasize to students that it’s perceptions that matter, not reality when it comes to marketing.
Consumers don’t buy products, they buy solutions to their problems. Your competition is any business providing a solution to the same problem as your product. That includes, according to Porter’s 5 Forces model:
- direct competitors that provide a similar product. For instance, the iPhone and Samsung smartphones are direct competitors. When businesses build an assessment of their marketing strategy, they may only include these direct competitors in their analysis.
- indirect competitors that solve the same problem. The threat of substitutions is one of the most prevalent types of indirect competition. For instance, I might substitute a smartwatch for a more traditional timepiece. Even a smartphone competes as we see many consumers, especially younger ones, forgoing a device that only keeps time. Hence, if I operate in that market, I must consider the entire timekeeping market in evaluating my opportunities.
- the power of buyers is another form of indirect competition. If buyers have a lot of power because there are few of them who consume most of the product in your industry, they impact your decisions on pricing, distribution, promotion, and even the product itself. Consider the domestic beer industry (think Miller, Budweiser, etc). This industry is characterized by an 80/20 situation (called the Pareto principle) where 80% of the products produces are consumed by 20% of the market. In an industrial market, strong buyers might decide to replace you with a product produced in-house.
- supplier power refers to the strength of your suppliers to impact your performance. For instance, a strong supplier impacts both the quality and price you must charge for your product. Suppliers might also decide they can produce the same product internally. Hyundai was originally a supplier for Japanese-made car manufacturers before entering the market on their own.
- the threat of new entrants comes from a variety of sources, including both buyers and sellers, as mentioned earlier. New entrants will enter a market when they see an opening to make money in that market. For instance, two Steves (Steve Jobs and Steve Wozniak) formed Apple Computers in their garage when they discovered an opportunity for a non-MS-Dos computer.
When competition is strong from any of these sources, or all of them, it forces companies to adapt if they wish to survive/
Changes necessary in the age of social media
With the ubiquitousness of digital opportunities to promote your brand and the ease of international sales due to lower export restrictions and the expansion of international trade agreements, your competition exploded. Many markets now face hypercompetitive environments.
Now a company in China can assess your market directly rather than in a situation where you distributed their products and took a piece of the profits (supplier power). The low cost of access to markets on social media allowed more new businesses to form and thrive (threat of new entrants). Greater access to consumers and their attitudes strengthened the competition provided by your direct competitors if you didn’t develop a strong community of your own on one or more social platforms.
The business environment in the ’70s was very different than today, requiring different methods to ensure success. The “dog eat dog” mentality of that time, especially along the value chain, gave way to the collaborative model of business competition that relies on long-term relationships that make the pie bigger — ensuring each member gets a bigger slice — rather than piggishly trying for as much of a smaller pie as you can get.
Now, that isn’t to say businesses are all holding hands singing Kumbaya, but fierce competition is replaced by co-opetition — the notion that businesses must cooperate to survive and competition is based on providing strategic competitive advantage rather than killing the competition.
And, while Porter’s 5 forces model paid lip service to the role of suppliers and buyers in ensuring business success, today’s environment requires an egalitarian notion giving these partners equal standing. Rather than ordering members of your supply chain and expecting blind obedience, firms must work together. For instance, Chrysler brought suppliers into the automobile development process and brought in dealers to understand the drivers of consumer choice earlier to build a better car more cheaply.
So, let’s take a look at specific changes wrought by social media.
Changing Porter’s 5 Forces in social media
The power of buyers
In the original Porter’s 5 forces model, buyers only had power in B2B markets where only a few buyers bought vast amounts of a company’s products. In the new 5 forces model, social media gives power to thousands of individual consumers who talk about the brand within their social networks. Businesses must cater to these individuals, respond to their concerns, and reward their compliments. This is especially true for influencers of all types since a single negative review from one might spread in a viral fashion to wipe out other positive reviews. It’s not just celebrities but everyday users who hold influence over their community.
Ignoring the power of your consumers is no longer an option
Power of the media
Porter’s 5 forces model never recognized the power of the media to impact consumer attitudes, which in turn impact their buying decisions. Frankly, I’m surprised no one ever added this very real force to the model.
In the days of social media, you have not only legitimate news outlets (a number shrinking every minute) but a vast number of bloggers who cover your market. These folks post reviews of your product, share information about you (both positive and negative), and provide instructions for users to get the most from your products. The explosion of media and the resulting splintering of their viewers means we now face silos where information (even misinformation) spreads in a tunnel where alternate opinions and even facts have no bearing on beliefs.
Joining the group of bloggers are advocates for your brand across social networks like Facebook, Twitter, and TikTok. Sometimes called brand evangelists or collectively as your tribe, the value and importance of individual word of mouth and blog media can’t be overstated.
Ignoring the power of social media is no longer an option
Power of new entrants
The threat of new entrants into your market is tremendous and the low cost of advertising on the internet gives them easy access to your market — especially if you’re not all you can be online. If a market need exists, someone will exploit it so it makes sense if you’re the one to seize the opportunity. You have the brand image and awareness necessary to attract existing customers to your new product, as well as the understanding of how to reach them. If the product is related to the one you already produce, you also have an existing supply chain and industry know-how to make your expansion successful. It’s always better to be your own competition (called product cannibalization) than to let someone else capture that segment of the market while you’re asleep at the wheel.
Not only should you proactively scan for the prospect of new entrants, as in the original Porter’s 5 forces model, but you also need to reach out to them and invite them into your tribe.
Remember the old saying: “Keep your friends close and your enemies closer”. But, seriously, you need to understand these new entrants and get them to start helping you rather than letting them dethrone you with new ideas and strategies that surpass your current advantage. You also don’t need these bright, innovative competitors cooperating with your existing competitors to force you out.
Bring possible new entrants into your tribe as soon as they’re identified
Surviving against Porter’s 5 Forces competition
Surviving the pressure exerted by all forms of competition requires a constant awareness of the environment, including evaluations of various levels of competition and changing consumer attitudes. We call this market sensing and firms that excel in sensing surpass the performance of those who do not.
Of course, sensing alone isn’t enough. You must establish a culture where new information is incorporated into developing market strategies so you’re always ahead of your competition.
I hope you get the idea of how Porter’s 5 forces model is modified to improve your strategies in the age of social media. Certainly, social media affects Porter’s 5 forces model in other ways. If you can think of some, please add them in the comments.
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