MBA Schools love to educate us on various tools of thought or approach but over time many are proven wrong, not-quite-right, or just another management fad.

One that looks like it may go the distance, equally at home applied to existing businesses or new ventures – Porter’s 5 Forces.

Understanding Business Opportunity Porter’s 5 Forces

Porters 5 Forces model breaks down the attractiveness of a market to five categories- threat of new competition, threat of substitute products or services, bargaining power of customers, bargaining power of suppliers and intensity of competitive rivalry.

The following diagram illustrates it best:

Bargaining Power of Customers

Do your customers have another choice? Do they feel they don’t have to buy your product or service? A customer with choices will place pressure on your pricing. As with all of five forces it is important to consider how each force is trending.

Bargaining Power of Suppliers

Who do you rely on to deliver your service or product? In a way, this force is the opposite of the first. If you must choose to deal with the one supplier, and they know you do not have other options, they will be free to increase your cost of goods. It will only be a matter of time.

Threat of Substitute Products

When considering threat of other products it is too easy to think only in terms of equal or very similar products. Porters model reminds us that competitive pressure can come from substitute products; products that are different in nature but fulfil the same need.

For example, a laptop manufacture may consider only other laptops as competition, however, there is significant threat to their business from substitute products such as iPads and other tablets.

Threat of New Entrants

How likely is it that another company will enter the market? As a rule of thumb, any industry experiencing abnormal profits and/or innovative change will be challenged by a conga line of new competition. If the market has come about through innovation, then the new entrants to the market are likely to be big players in a related industry with substantial experience in end to end business efficiency.

This is where the young businesses, the ones that reacted to the opportunity the quickest start to have trouble. They know how to innovate and seize opportunity, but often struggle to match an established firms back office and process efficiency. They are also less able to negotiate favourable terms with their suppliers. When the big firms start to move in, the small players need to either prepare for sale, or relentlessly improve their deficiencies.

Competitive Rivalry within the Industry

This one is the most obvious of the five. How much existing competition is there? How hard do you have to fight to get sales and stay in business? Is there a threat of a price war between competitors?

So that is a quick tour of understanding business opportunity Porter’s 5 Forces style. I consider it to be a great framework for analysing business opportunity.

Agree? Disagree? Hit me up with a comment!