Porter’s Five Forces analysis (P5F) is a deceptively simple tool. Much like a SWOT analysis, this structure has a basic setup and grading system for your findings. But, this superficial simplicity is only skin deep. In this article we will break down the Five Forces that influence your business and take a look at how you can adapt and change your offering to give you the greatest chance of success. As a freelancer or small business owner, maybe even as someone thinking about changing career and lifestyle, knowing your market, your positioning and your competition is crucial but also daunting. Read on to find out more about how to mitigate these circumstances and be prepared for (more or less) anything. 

Understanding Porter’s Five Forces

The P5F are: Competition in the Industry; Potential of New Entrants into an Industry; Power of Suppliers; Power of Customers; Threat of Substitutes. And there are 3 levels of grading: Low, Medium and High. Let’s break this down further.

Competition in the Industry:

No matter how innovative and groundbreaking your idea is, there will be a certain level of competition in your field. The supplier of a certain product may well have had a similar idea to yours. Maybe the problem you have faced and solved is also being faced and solved by others. Whether you are in a saturated market or in a more monopolistic one, it is worth doing your homework on those who are direct and indirect competitors for your product. 

Porter Five Forces Analysis
  • If you realise that your competition is LOW then you have few direct competitors. This might sound great, and often it is, but just be aware of there being an underdeveloped market for what you offer. This might require a certain level of education to make potential buyers or customers receptive to your offering. 
  • MEDIUM competition levels would suggest that there are a healthy number of competitors clearly responding to a number of customers who need you and your product. 
  • HIGH levels of competition means the market is at saturation point but if there is something that really defines you and makes what you offer unique then leverage this and use it to your advantage. Each customer is looking for something precise, just because you are a new entry doesn’t mean you aren’t the best entry. 

Potential of New Entrants into an Industry

P5F is an analysis that can and should be done regularly whether you are a new business or a more established enterprise. Markets and trends change, new entrants to your field arrive and others leave. Staying on top of this information is only going to strengthen your business. 

  • LOW new entry threat suggests that either the market is saturated (and so few people want  to risk entering the market), there are few entry barriers or there are one or two companies that are dominating the field. It might also suggest that there is little call for your product any more. However, it may also suggest that there are few people out there with your knowledge, skills or experience and so new entrants are few and far between.
There is always something that you can use as leverage, identifying what that is, is the key. 
  • MEDIUM new entrant threat suggests that people have seen the potential in your business area, that the market place is growing and that you need to start increasing efforts in marketing or brand identity to keep loyal customers engaged and attract new potential clients. It does prove that your product or service is growing in popularity and more people have need of you.
  • HIGH. Being an influencer a few years ago was a niche that very few people considered as a job. There were some names that we all knew but didn’t see influencer marketing as something that was accessible to anyone with a phone and a social media account. Now it seems that daily we have an influx of new wannabe influencers trying to make their name on platforms with 100s of millions of users and millions of influencers. However, not every influencer is the same and there is a reason that some influencers gain and maintain large followings – they have something unique about them that keeps us interested in who they are, what they say and what they sell. It’s the same for you in a high threat from a new entry situation. If there are thousands of new entrants to the market each year but you offer something that is so specific to you that no one else can copy you or be considered similar then the threat is highly reduced. The key thing is individuality here.
The world is becoming more uniformed, the best thing you can do is to be unique and yourself. 

Power of suppliers:

The cost of living is hitting everyone and suppliers are no different. Certain base materials are restricted due to climate and conflict affected shortages, workforces are reduced in order to cut costs and fuel prices are constantly on the up. There is a delicate balance therefore to be struck as, depending on what you need to conduct business, your suppliers will have a greater or lesser impact on your product. Put simply the less power a supplier has, the more you as their customer hold. You can dedicate prices and switch to or leverage the product of other supply competitors. The power of the supplier is the direct opposite.

  • LOW supplier power means that you, as the customer, are more likely to make a deal on the products, have freedom to change suppliers. 
  • MEDIUM power means that you are the supplier and are evenly balanced in your negotiating power. The likelihood is that you have a long standing agreement that benefits both sides because you know there is little sense in you moving or changing. 
  • HIGH supplier power is the one most often feared by small businesses. If your supplier holds all the power then there is every chance that you will be paying a premium simply because your supplier can do that. Your lack of choice makes the situation rather difficult. But do not fear. There will almost definitely be another supplier that is more in line with your values, you could simply try talking to the company and seeing if there is a deal to be struck or you could see about changing the product to incorporate a different material thus giving you a wider choice of suppliers.
There is always a solution, just sometimes you have to be a little creative.

Power of Customers:

Your suppliers have power and so do your customers. The age old adage is that the customer is always right. In reality, sometimes they aren’t and that’s ok, but persuading them of that might be difficult. Customer power lies in the reach of your product and the demand/supply scale. 

  • LOW: If there is a lot of customer demand and little supply, you as the supplier have a lot of power. You are one of only a few, it’s almost a monopoly. You can set your prices and your client base accordingly because the fight for customers isn’t there. 
  • MEDIUM: If the demand and the supply are well matched then business will be more predictable. You can probably count on a steady regular income. There are competitors in your area but you all provide sufficiently different offerings that allow you to do your own thing and grow at a manageable pace. 
  • HIGH: This is probably more common than you think. There might be hundreds of jewellers or potters that make bespoke gifts for weddings. This gives the customer a great deal of power, they have a wide range of choice about what to buy and at what price.
Daunting as this may sound, you can leverage certain things to make sure you don’t suffer from lower demand and higher supply.

Wedding rings are an example I’ve used before but they illustrate the point perfectly. Most wedding rings are the same, a gold band which might have a slight embellishment but is usually very standard. What makes a couple choose their rings is less about the band itself but about the experience they had when buying it. The story that the artisan told, where the materials were sourced and how it can be made individually for you is paramount. As is so often the case, we choose based on personality and emotional reactions. This is also how you build customer loyalty and build your customer base and even a community around you and your work. 

Porter Five Forces Analysis

Threat of Substitutes:

This might be the moment to take another look at the Indirect and Direct Customer article I wrote a few weeks ago. There will always be a substitute in some way for whatever you do and whatever you sell. And that’s ok. You sell handmade clothing and your potential customer is looking for a gift for a friend. She might well choose one of your pieces or some jewellery from the next shop. She might look online and find a hand carved chopping board or an individually blown vase from an historic glass workshop. Or you never know, she might buy her friend a subscription to an online learning platform.

Everyone can be a ‘threat’ but the world would be a very sad place if that’s how we start thinking.

Instead see this as an opportunity to experience, to collaborate and expand your horizons about what is possible. Staying true to who you are is the thing that we will never find a substitute for. Use what makes you you as your most important and unique selling point!

  • LOW threats here would be that you are the only in person pottery workshop in a creative area of a large town. You have no direct threats and probably only a few indirect competitors. 
  • MEDIUM substitution threat might come from the fact that you are a web designer that specialises in one platform. There are others out there who do the same and who specialise in other platforms. The threat is only medium because people are always looking for web designers. As your website is built so well, people can see what you do and you were placed well on their search returns thanks to your excellent SEO skills.
  • HIGH threat of substitution has an alarming ring to it, but do not panic! As ever there is some positive to be found and a solution to be created. There are hundreds of fast fashion chains that sell on trend fashion at low prices, you sell handmade timeless pieces for a price that reflects the time, materials and skills that go into making each garment. Yes it would be easy for shoppers to go for the fast fashion, they would get greater volume for less expense but the relationship with you as the maker, the sense of status that handmade garments gives, and the perception of quality that a high price tag offers is lost in fast fashion (even the expensive ranges).
Porter Five Forces Analysis

Conclusion

As a freelancer or an entrepreneur the likelihood is that you can work closely with your client, build up a relationship and have them spread the word of your work. By creating a brand that cares about the customer and shares their values you will begin to strengthen your grip on those HIGH results. And remember that, although doing a regular benchmark, SWOT, P5F and other analyses, sometimes just going with your gut feeling can be the right thing to do. There are rules about how you should and shouldn’t do something, and at times you just have to rip the rule book up and do your own thing (although do get some advice from someone you trust, just to check that it’s not going to be a hugely expensive waste of time…).

Porter’s Five Forces analysis is great to give you an overall insight into where you stand as a company and if your entrepreneurial idea will float. If you think you have something brilliant in mind and want to see how you can take this to the next level then why not sign up for our next Business’n’Play session. Follow this link to find out more!

For further reading, here are some resources that you might find interesting:

https://www.mindtools.com/at7k8my/porter-s-five-forces

https://www.investopedia.com/terms/p/porter.asp

https://www.isc.hbs.edu/strategy/business-strategy/Pages/the-five-forces.aspx

https://www.forbes.com/advisor/business/porters-five-forces/

https://www.businessnewsdaily.com/5446-porters-five-forces.html

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