Looking At Your Business Using Porter’s 5 Forces
Posted October 31, 2022
Posted October 31, 2022
Have you ever needed to create a SWOT analysis for your company? In this analysis, you are evaluating what is going well within your company and looking externally to see what could potentially disrupt your business.
Porter’s 5 Forces is like a SWOT analysis. Porter’s 5 Forces looks at 5 different elements that showcase your business’s strengths, weaknesses, and vulnerabilities. By evaluating these 5 components, you can not only evaluate your own business but also those you are looking to invest in.
Is there another company that does the same thing you do, only better or at a lower price point? If you are facing stiff competition, you find yourself in a more vulnerable position. On the other hand, if your business offers something no one around you does, you’ll find that you have more power in the situation.
If you don’t have stiff competition around you, that may not matter for long if it’s easy for someone new to break into the market. How much time, money, and effort are required for a new business to enter the industry? If this is a more challenging feat, your business is in a stronger position. However, if it’s easy, you could face more competitors soon.
How much do you depend on your suppliers? If their major manufacturing plant shut down for an extended period, would you be worried, or could you switch to a new supplier easily? If you find that you depend on a specific supplier and could be crippled if they raised prices, shut down, or stopped producing what you need, this is a weak spot in your strategy.
Like suppliers, it’s important to look at the size of your customer base. Do you have a few loyal but strong clients, or do you have numerous independent clients? You will find that if you depend on a smaller client base, they will have more power to negotiate prices, products, and standards. However, you will have more control over the prices and standards if you have many smaller sets of clients.
How easy is it for someone to find an off-brand of your product? If the business sells a common product, consumers will have the ability to shop for the best deals from competitors, and you’ll risk losing their business. However, if there is little to no threat of substitute products in the market, your business holds more power over prices, standards, and other purchasing factors.
In 1979 Michael E. Porter created Porter’s Five Forces, which has been used to guide business strategy. Whether you are researching your next investment, understanding your business valuation, setting up your exit plan for success, or simply researching out of curiosity, Porter’s 5 Forces can help you see what is influencing various business sectors.
Have more questions about Porter’s 5 Forces and their relationship to your business investment strategy? The Thayer Financial team would love to work with you and walk through these 5 forces together. Visit our website today to schedule your appointment.
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