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If you want to know how Porter's five forces applies to business with examples, you have come to the right place.
In this article we explain Porter's five forces and show you how to use the examples, largely focused on building your career.
Porter's five forces examples
Porter's five forces and examples include:
1. Risk of entry by potential competitors
2. Bargaining power of suppliers
3. Threat of substitutes
4. Rivalry of established companies
5.Bargaining power of buyers
If you are a student or if you are in training to make a lot of money in business or in marketing, this article is going to help you focus on the most important parts of Porter's five forces.
Let's get started.
If you are looking at Porter’s five forces, you are probably in one of three camps:
Regardless of what camp you are in, Porter’s five forces are largely about the competition.
And if you are a hungry marketer, you probably shouldn’t care too much about the competition. That's because you will be too busy marketing and innovating. Let the competition try to follow your lead, if they can.
Let’s now chat about Porter’s five forces, and then look at some great examples of two excellent public companies who benefit from Porter's framework.
As we said before, Porter's five forces are largely focusing on the competition.
And with the right marketing, you can excel past them.
The competition, that is.
That’s because the majority of your competitors are not great at marketing.
Here’s an example of video tutorial breaking down a typical competitor's method for acquiring customers (this teaches you what NOT to do):
Most companies are not very good in how they acquire a customer, let alone keep them. A superior marketing plan developed by you can grow your company by leaps and bounds. And keep your competitors from acquiring the market share you have decided to acquire.
Ok, Michael Porter developed the five forces.
And the majority of this framework is all about your competition.
The five forces are:
You see, regardless of who is trying to win your customer, you can do better.
Deep pockets don’t matter too much.
The customer is the only concern. And they want value, truth, a great deal and to be treated fairly by a real human they trust.
You can do all this and more, far better than competition theory.
Doing Porter's five forces isn’t a magic trick. It’s really very simple.
And we have two excellent grad school examples below.
But in the real world, Porter’s five forces may not matter much beyond some strategic planning initiatives for companies that have an existing market position.
Here’s what you need to know.
First, if you can buy more inventory than the competition, chances are high you can benefit from economies of scale and realize more profit per sale or be more efficient at acquiring first time customers because you have more wriggle-room in how low you can go to win a new customer.
Second, if your suppliers like you and you and you can secure a lot of their product, your suppliers will award you with a lower price than what a new competitor can purchase. Thereby increasing your net income and having a better relationship with your supplier vs. a new competitor.
Third, if your product is good and you tell your customers often through your great marketing and treat your customers like a human, why would a customer want to look elsewhere for substitutes? Be sure to have a big thumb on inventory management so you don’t piss off your customers and run out of product.
Ramp up your marketing and your great communication starting today, with these two strategies that your competitors are implementing poorly, if at all:
Fourth, if there is a remote chance your suppliers are going to black list you, keep a tight thumb on them and have a plan B, plan C and plan D ready for immediate roll-out.
Take no prisoners here and care less than zero percent if you have to move suppliers.
You have to take care of yourself, your staff and your customers.
If you get even the smallest clue that your suppliers don’t care about you, bring in the reinforcements. Buy their competition. Practice backwards integration.
Fifth, if your big buyers are even thinking about squeezing you evermore, have a plan. Go direct to consumer (DTC). Be aggressive. Get better at email and direct mail communications. Launch PR and go for the jugular. Amazon and Walmart do -- their business model is centered around squeezing their suppliers bone dry. But you can circumvent and land in your customer’s inbox and mailbox, too.
Porter’s 5 forces are very important theories and provide an interesting framework for those wanting to maintain the market position they have. And for identifying opportunities and threats.
And that is where these Porter’s elements can prove useful.
After all, who doesn’t want to limit their competition from competing with you?
Well, if you regularly innovate and market greatly, you won’t ever have to worry about the competition again, because you won’t have any.
But if you cower in the corner, and are always worried about the new kid entering the marketplace, or worried about your supplier raising prices, or how your main competitor will steal your customers,
then Porter’s five forces are evermore important.
So let’s go through some examples.
Here are two great Porter's frameworks of real companies. These were written a few years ago and the data is not accurate today. But that is not the point -- the point is the framework -- which is very accurate.
And, Under Armour and Nucor happen to be great companies who still compete in fiercely competitive environments and have always had competitive threats.
Let’s dig in.
The CEO of Under Armour Inc is Kevin Plank, who oversees approximately 6,500 full time employees. The corporate headquarters is located at 1020 Hull Street, Baltimore, MD 21230 United States and their website is located at: www.underarmour.com. The primary industry Under Armour operates in is Men's Clothing Stores, NAICS 448110.
Like any company in a competitive environment, Under Armour faces multiple opportunities and threats challenging their position in the performance sports apparel industry which was responsible for 75.6% of their 2013 net revenues, a sector of their primary industry, Men’s Clothing Stores. Each of these factors pose a strong, moderate or weak “force” against the company, which can have an immediate and near term impact on their profit margins. Porter’s 5 competitive forces, ranging from suppliers, rivals, buyers, potential competitors and substitutes, are discussed in detail below.
Under Armour has invested much into building brand loyalty, representing a strong competitive advantage and subsequently a relatively weak competitive force. Because of a strong reputation and loyal customers this presents a barrier to new entrants. Additionally, because they have a strong base of existing business, Under Armour can gain access to cheaper capital. This is because they pose a lower risk than a new firm presenting a strong competitive advantage and again a relatively weak competitive force due to an absolute cost advantage.
Under Armour produces a high volume of apparel, in relation to new entrants and therefore can gain an edge in economies of scale, representing a weak competitive threat. While they do have a strong brand, customer switching costs remain low as they can easily switch to another line of clothing, representing a strong competitive threat from new entrants. Lastly, while government regulations pose a weak threat to new entrants in the US, it is possible this can pose a more moderate series of threats with international expansion due to the unknown and changing political environments and laws.
While the performance sports apparel industry has unique products and solid brands, there are many options providing multiple substitute solutions, weakening the threat of a supplier’s bargaining power position. Being a multi billion dollar market, the performance sports apparel industry is an important customer to sports apparel clothing suppliers, which limits their threat to the industry. While it is possible that suppliers can compete with industry rivals, the threat is minimal at least partly due to strong existing brands. For UA in particular, with 50-55% of the fabric coming from six suppliers across five countries and a dependency upon price fluctuations in oil and cotton which are necessary inputs, this poses a moderate threat to the industry.
In 2011 - 2013, 70% of UA’s net revenues came from retail stores with two chains representing 22% of the company’s net revenues. This poses a strong threat to UA’s revenues because if these large accounts stopped buying, or reduce their order size or the number of stores selling, profits could be substantially reduced. Additionally, because switching costs are so low for end use consumers to use other products, this represents a strong industry-wide threat that can decrease profits.
One of the most critical and readily available threat to the performance apparel sports industry is foregoing with the product altogether. At a zero cost to the consumer, and therefore a favorable customer switching cost, this substitute product is the cheapest substitute of them all and one that poses a strong threat to the industry regularly pressuring rivals to produce an innovative, quality product filled with extreme value. Additionally, there are lesser expensive products substitutions, such as a cotton t-shirt, tank top or other outdoor gear suppliers, that pose a strong threat of substitution and threaten industry profits, in addition to UA’s profits.
The performance sports apparel industry is a relatively consolidated group of competitors, with a close and large fragmented world of activewear, sports and fitness wear. Low customer switching costs causes the rivalry to be a strong threat and thereby weakens profits. With the constant threat of competitors creating a price war, boosting sales volume, increasing market share or signing a new superstar to represent their brand, this causes a strong rivalry threat and can reduce profits.
The health of the performance sports apparel industry is closely tied to the participation of a variety of sports. For example, when complementary products such as baseballs, basketballs, cleats and football pads are being purchased, the need to purchase performance sports apparel rises in relation. When these numbers are rising then profits are also rising.
The primary industry Nucor does business in is Iron and Steel Mills, identified as NAICS 331111. The U.S. Steel Producer’s industry is in a mature stage, largely identified as such due to it at risk of being an oligopoly because of high exit barriers, threat of serious price competition due to a commodity like product and trends of excess capacity as noted in the case study. Also, the industry is in a consolidation phase.
Additionally, central to Nucor’s strategic growth plan is acquiring companies that may have excess capacity in order to enhance their own capacity, thereby also helping to consolidate the industry. One related diversification and backward vertical integration strategy in particular involved helping them to gain control over their raw materials. And many horizontal acquisitions led to greater capacity, product expansion, better servicing of customers geographically leading to a better profitability outlook. Additionally, Nucor entered unrelated diversified projects leveraging their competencies such as the Encora Oil & Gas project to help offset the price of an important input.
Global initiatives have led Nucor to develop trading offices in strategic locations that made it easy to transport products. Nucor also made joint ventures with key partners, several throughout Europe, and an important alliance with a global training partner in Japan.
These strategies have helped Nucor to be able to advance their generic business level strategies. Starting as a broad low cost steel provider, they became more of an innovative company benefiting from a broad differentiation strategy offering many value-added products. This empowered them more than the competition largely due to competencies that have helped them to sustain lower cost advantages. Examples include new techniques to enhance their galvanized steel plants, new cut-to-length capabilities and new vacuum degassers leading them to produce a higher-grade sheet steel, all contributing factors that led to more sales due to higher value passed on to the customer.
A steel company that has invested much into brand loyalty, representing a strong competitive advantage and subsequently a weak competitive force. Because of a strong reputation and loyal customers, this represents a strong barrier to new entrants. Specifically, for Nucor, who provides a solid example because they have a strong base of business, can gain access to cheaper capital. This is because they pose a lower risk to creditors than a new firm. This presents a strong competitive advantage and again a relatively weak competitive force due to an absolute cost advantage, leading to an increase in profits. This is probably very indicative of the industry.
A company that produces a high volume of a wide array of related steel products in relation to new entrants can gain an advantage in economies of scale, representing a weak competitive threat. Customer switching costs are high as they can't necessarily easily switch to another steel manufacturer especially mid project development, nor mid contract, representing a weak competitive threat from new entrants which can boost industry profits.
Lastly, government regulations pose a threat to new entrants, and can pose a large threat to international expansion due to unknown political environments and changing laws.
The U.S. Steel Producers industry offers many products that provide multiple substitute solutions. This weakens the threat of a supplier’s bargaining power position. Being a multi-billion-dollar market, the U.S. Steel Producers industry is an important customer to suppliers, which limits their threat to the industry. While it is possible that suppliers can compete with industry rivals, the threat is minimal at least partly due to strong existing brands which leads to near term industry profits.
For Nucor in particular, and as a good example of the industry's threats, since they were the biggest user of scrap metal in America, their strategy was to gain more control over this important input. Because of this, for them, they substantially strengthened their position in this regard, and reduced the threat of entry. For competitors that do not have this advantage, the industry faces a strong threat from suppliers based on the rising scrap prices, posing a significant threat to profits.
The largest threat probably comes from the commodity nature of the products, primarily driven by the demand-supply of the product in question. This market driven nature of steel products, places a strong threat to industry profits.
Combined with the fact that each product is essentially the same from producer to producer, this places a higher than average power in the hands of the buyers to locate the most superior product for their needs.
This poses a strong threat to industry revenues because if customers, especially large one, stop buying, or change technologies, profits could be substantially reduced. Additionally, switching costs are high for buyers, especially those in mid contract to use other products, this represents a low industry-wide threat that can increase profits.
While there may be many variations of steel products that car serve as product substitutes, the threat of a substitute for a steel made product, such as cold-finished steel used in farm machinery, is low, thereby increasing industry profits. But because there are so many producers of steel products, creating a hyper-competitive market-driven environment, the threat of close substitutes within the industry is strong leading to a decrease in industry profits. Additionally, the threat of new technology advancements poses an ongoing threat of substitutes, but probably is a weak threat in the near future.
The US Steel Producers industry is a relatively consolidated group of competitors, with a close and large fragmented world of smaller more unique producers representing strong substitute threats. With an intense rivalry among a small group of large producers, this decreases prices and increases costs on alternative strategies, leading to a large industry threat and decreased industry profits.
Additionally, once the customer has been won in the Steel industry, high customer switching costs causes the rivalry to be a lower threat and thereby raises profits. But with the constant threat of competitors creating a price war, facilitating a supply-demand commodity environment, this causes a strong rivalry threat and can reduce profits.
The U.S. Steel Producers industry is closely tied to the health of the economy, as evidenced by the large decrease in sales during the great depression of 2009-2010. This poses a strong threat to the tens of thousands of the complementing industries that need steel products, such as auto, machinery, hydraulics, compressors, motors and appliances. When the economy is weakening sales in any one complimentary segment, this is a strong threat and decreases profits. Because of the diverse range of complementary industries that require steel products, this provides a hedge that supports a weak threat to industry profits, at least in the short term.
Stakeholders in the steel industry encompass virtually the entire planet. That's because steel is tied to so many environmental factors -- and steel provides the literal infrastructure for virtually every activity in daily life. For example, when concrete sales are high, this is an indicator that the building industry is healthy, and thereby can increase the need for steel production raising industry profits. On the flip side, with an added focus on the environment, as Nucor does, the steel industry can gain local and global positive attention which can keep the focus and the need on steel products, again lifting industry profits.
If the economy and macroenvironment remain stable, the U.S. Steel Producers industry will realize sustained profits in the short term. In the future, as long as the majority of the many industries served by the steel industry continue to maintain a healthy output, the steel industry will continue to produce.
End of Porter’s Five Forces examples.
To reiterate, Porter’s Five Forces provides a useful structure to assess the situation. Management teams will often do a Porter’s Five Forces strategy session, a SWOT analysis, and a Strategic Group Map every year or two to identify opportunities and threats.
But just as important, if not more important, is to do regular quarterly strategic sessions to plan out your marketing strategies. Because with customers, management will be left doing Porter’s Five Forces strategy sessions with empty shell companies.