Understand your company's chance of success.. Porter's Five Forces

To help the understanding of how company and its products may fare in a marketplace, Michael Porter provided a simple five element model to indicate areas to investigate, opportunities and threats. A quality lens in each of these areas can help business managers to further identify potential strategies.

Rivalry
The most common source of threat and the most common place where threats are assessed is with existing competitors, where pricing and product/service quality are a typical source of advantage. In assessing this, you can analyze their products and test their services to understand something of their methods. When you have many powerful competitors with great products, the competition is likely to be hot and dangerous. If you want to stay in such markets, you need excellent quality and smart innovation to stay ahead.

Purchasing power of the customers
When you have big customers and price competition, your customers are likely to demand deep discounts. Just as you have professional salespeople, they have professional buyers who know how to negotiate. Big customers may also demand product customization. When you have serious price competition, quality improvement must focus on strategies such as cutting costs, for example with parts production, and process simplification while sustaining overall product quality.

Bargaining power of suppliers
Supplier can also have power over you, particularly when the balance supply and demand is tipping in their favor. If they are the only suppplier of a critical part, then they can hold up your whole process. You also need to manage supplier quality, of course, because it is possible they may let quality slip while boosting their profits, possibly at a long term cost to everyone.

Threat of new entrants
To enter a new market can be quite expensive , but new entrants often appear with special invenvestment and the latest equipment, making them a serious problem even when you have a good market share. The best approach here is often to keep the barriers high , making it ruinously expensive to join the game, for example by constantly competing with yourself even when you are a market leader, driving quality up and costs down on a constant basis. You can also tie up suppliers and channels to the market, making it difficult for new people to get to these critical resources.

Threat of substitutes
The classic substitute competitor is margarine for butter, a curve ball that farmers probably did not see coming. A good way of looking for substitutes is to consider "share of wallet" as a critical measure.

If you sell coffee, your competitors are all beverage sellers. If a person is looking for a drink, then beer, cola, tea and water may all be competitors, with new drinks such as health drinks as relatively recent substitutes. The quality approach in understanding substitutes is to "chunk up" to the higher purpose. For example, a car hire company might consider transport as the real benefit  and so consider the threat of bicycles to their business.

A sixth force that often considered is governments, which can have a significant effect on companies and their competitiveness , through legislation and taxation. In international competition , one should expect support from one's own government and obstacles from local government. Having international standards established within the firm can be very helpful for this.




JOP with Philip Kotler-Marketing guru and author of best selling books worldwide.