Today’s COVID world is forcing many businesses to think about reinventing themselves and spreading their risk - possibly through moving into new sectors or markets. If this is something you’re considering, Porter’s Five Forces is a simple yet powerful tool for understanding the competitiveness of your business environment, and for identifying your strategy’s potential profitability. It will allow you to see the issues clearly and adjust your strategy accordingly. The tool was created by Harvard Business School professor Michael Porter, to analyze an industry's attractiveness and likely profitability. Since its publication in 1979, it has become one of the most popular and highly regarded business strategy tools.

As Michael Porter is quoted as saying in the Harvard Business Review managers often define competition too narrowly as if it occurred only among today’s direct competitors. Yet competition for profits goes beyond established industry rivals to include four other competitive forces as well: potential entrants,  suppliers, customers, and substitute products. The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry.

So what are each of Porter’s Five Forces - and how can they help you to analyze the strengths and weaknesses of your market position and impact your long-term profitability? Here’s a quick look:-

1. INDUSTRY COMPETITORS - ie. the number of existing competitors and their ability to undercut a company. The more competitors there are (along with their equivalent products and services) - the less power your business will have. Suppliers and buyers will seek out competitors for better deals or lower prices. Conversely, if there are fewer competitors, your business will have greater power to charge higher prices and set deal terms to achieve higher sales and profits.
2. POTENTIAL THREAT OF NEW ENTRANTS TO AN INDUSTRY - basically, the less time and money it costs for a competitor to enter a market and be an effective competitor, the more an established company’s position could be significantly weakened. How tightly a sector is regulated or not can also affect this. An industry with strong barriers to entry is ideal for existing companies within that industry since the company will be able to charge higher prices and negotiate better terms. So think carefully about how easy it is to get a foothold in the industry or market you are considering entering. 
3. SUPPLIER POWER - how easily can suppliers drive up the cost of inputs? This is influenced by the number of key suppliers of a good or service, how unique these inputs are, and how much it would cost to switch to another supplier. The fewer the suppliers to an industry, the greater a company’s dependence on that supplier. Conversely, many suppliers, and low switching costs between them, means a company can keep its input costs lower and enhance its profits. 
4. BUYER / CUSTOMER POWER - customers can drive prices lower - depending on how many buyers or customers a company has, how significant each customer is, and how much it would cost to find new customers or markets. The smaller and more powerful a customer base, the more power they have to negotiate lower prices and better deals. A company that has many, smaller, independent customers will have an easier time charging higher prices to increase profitability.
5. THREAT OF SUBSTITUTION - Companies that produce goods or services for which there are no close substitutes will have more power to increase prices and lock in favorable terms. When close substitutes are available, customers will have the option to forgo buying a company's product, and a company's power can be weakened.

If you’re looking to diversify and grow your business, it’s essential that you understand and continuously monitor any changes in these five forces - and adjust your strategy accordingly. Ultimately this market analysis and insight will help you boost your profits and safeguard your long-term growth.

If you’re also interested in offshored outsourcing as part of your diversification and growth strategy, download our eBook, '30 Essential Questions to Ask a Provider Before You Outsource’. It will ensure you're informed and have the right questions to ask when considering the next step.