Porter’s five force diagram is a simple but very important tool for analyzing the market for new and existing companies. If you want to research in the market to find out how much power your company has over the suppliers, buyers and competitors, this technique is here to help you out.
Importance of Porter’s Five Force Diagram:
- Supplier power:
At this point of this diagram or technique, you understand the power of your suppliers in the market. As a business owner, you know that you need suppliers at every point and it is not possible for you to make good profit if you don’t have enough choices to change your suppliers if they have enough power to drive up or increase the prices for supplies. This element gives you enough information about how much you need to worry about your suppliers. It explains that the fewer the suppliers are in the market, the more the power they have in order to manipulate you and cause your company a major damage.
- Buyer power:
At this point of this technique, you get to know your buyers and customers in a better way. In the same manner that suppliers can increase the price, the buyers can also decrease the prices if they want. With this point, you make sure that you understand how much power your buyers have and how easy it is for them to switch to another company if they are not satisfied with you. This explains that the fewer the clients you have, the better chances they have to ditch you and switch to another company.
- Competitive rivalry:
In simple words, this point explains your power in the market. You can easily understand that when there are more than enough companies in the market offering the same products as you or even with better quality, you have more chances to lose business including suppliers and buyers in the market. On the other hand, if there is no one up to your caliber in the market, you have kind of a monopoly to rule on the market with the prices that you want.
- Threat of substitution:
There are many threats to a business but the most crucial or important one is the substitution. When your rivals are offering the same products or services on lower prices, you have more chances of losing the business as your buyers can substitute to another product. This point explains if you offer a unique product or you have less power in this area.
- Threat of new entry:
This point is to make sure that you understand what it takes to enter in your market for a new company. If the business is easy or cheap, you have more chances of facing new companies every now and then. This will not only lesser your power in the market but it will also force you to increase the quality and decrease the prices.
Application of Porter’s Five Force Diagram in Business:
As we have discussed everything about porter’s five force diagram in the content above, with those details, now you can understand that this technique or method is very important for all the decisions made in a business. It doesn’t matter if you want to start a new business in the market or just want to make sure that your company has potential in the market, porter’s five force diagram is here to rescue. With the help of this diagram, you can easily understand the effects and results of decisions that you make and even if you haven’t made any decisions yet, you can foresee the future or the results of those decisions in time which gives you a chance to change your decision before it’s too late for you or your company.
Here is preview of a Free Sample Porter’s Five Force Diagram Template created using MS Word,