Understanding the Five Forces Model of Competition, and How To Use It Effectively

One of the critical processes that a business must undergo to be successful is to analyze their competitors accurately and know their position in the market. Competition affects a business, no matter how large or small it is. However, marketing specialists and economists have come to realize that competition within an industry is dependent on a few forces that are either beneficial or disadvantageous to a business.  

What Is the Five Forces Model of Competition?

Competition in an industry is never stable, but rather it fluctuates in tandem with five different forces. The existing competition is one force that can be affected by either the threats of newcomers or substitutes or by the bargaining power of suppliers or buyers. This is a model that was suggested by a professor at Harvard University in the late seventies, and he called these forces the macroenvironment of an industry. Additionally, the model shows that other factors of the macroenvironment can change the strategic position of businesses. These are factors within the industry that impact the business and marketing decisions of an organization but are beyond the organization’s control. For example, the industry growth rate or innovations in technology can greatly impact a business. 

To sum up, the five forces are:

  • The existing competition within the industry. 
  • The bargaining power of the suppliers.
  • The bargaining power of the buyers. 
  • The threat of newcomers into the industry.
  • The threat of substitutes within the industry.

Porter’s Five Forces Model Is Used To Assess the Competition on an Industry Level and Determine Profitability of a Business

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The aforementioned model is used by economists, marketers, and entrepreneurs to assess the intensity of competition within an industry. This is important because although competition is wanted, there is such a thing as too much competition. Pure competition is where there is so much competition that no one organization can have any influence on the price. This happens when there are many manufacturers (or providers) with very similar products. The result is that all parties are driven to accept normal profit levels, and newcomers can view this industry as unattractive because it has lower profitability. 

How To Use This Information to Your Benefit? How Can the Five Forces Model Help Your Business Endeavors?

If you’ve already entered an attractive industry with acceptable profitability levels, you need to analyze your competitors and the market structure, and using the five forces model is an excellent way to do so. By understanding the macroenvironment in the industry can help you position yourself within the industry and use various strategies to gain an advantage over your competitors. The model suggests a few strategies that you can employ to be successful in a competitive environment:

Focusing On a Niche Market as the Target Audience To Communicate Your Marketing Campaign With

After analyzing the industry and understanding the competition, an organization can choose to create a niche market and focus solely on providing products for the niche market. Their marketing campaign should be directed only on that market segment.  

Researching and Implementing Ways To Differentiate Your Products From Others in the Industry

By knowing their enemy (competitor in this case) organizations can focus their efforts on standing out in the crowd, to improve the consumer perception of their product by differentiating it from the competition. The five forces model can help organizations find gaps within the industry to fill and market their products accordingly. 

Reduce Your Costs While Charging Standard (or Lower) Prices To Achieve Cost Leadership

Organizations that find ways to reduce their manufacturing and production cost (for example, by taking advantage of the economies of scale) can control a larger share of the market. This is a concept known as cost leadership, and it is highly effective in increasing revenue.

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