Mr. Michael Porter and his Five Forces for Competition

Our friend, Mr. Michael Porter has given us a diagram to explain what forces affect you or your business in regards to competition. What a nice guy!

But what exactly is he talking about?

First of all, the five forces are........drum roll.......

1.) Bargaining power of the buyer
2.) Bargaining power of the supplier
3.) Current competition
4.) Threat of new entrants
5.) Threat of new products

Does this mean anything to you? If not, lets try to make all of these make sense. Here we go, one by one.


[[ 1.) Bargaining power of the buyer

What does this mean?

Who has the upper hand? Is it you or is it your customer? In most cases, you better hope it is you! Consider the following situation.....

You own a small hotel. It's off season. Your rooms are gathering dust and the cleaning crew is bored. You get a call from a school about six hours away from your hotel saying they are going to need to book every room in the hotel the following week.

Before you get too excited.....

She is offering you less than half the amount of money from the price during the regular season. Don't forget that the little runts will drive your employees crazy, make a mess,and drive any other potential customer who would pay regular price,away.

Sorry to tell you, but the buyer in this situation has the power. She's offering you less money and a lot of hassle but it is better than nothing. You will probably accept her offer. It's not so fun for the owner when the buyer has the power.

Let's switch things up....

You still own the hotel. It is now regular season. The same teacher calls, asks for the same deal. You tell her even more money than regular and state that you are offended that she would even make that embarassing offer.

Why can you do this?

Well, you see this time your hotels busy with regular paying customers and your staff is busy as well. You would lose lots and lots of money from regular customers as well as have them complain about the amount of noise that the kids are making. The teacher, in general would have a very hard time finding a hotel that is willing to put up with the kids, let alone accept less money for doing so.
In this situation, you, the owner have all the power.

Seems simple enough, right?

2.) Bargaining power of the supplier

This one has a very simple example that should be easy to understand.

You own a business that sells coke. You and many other businesses sell coke. Many, many other businesses! The supplier has many many customers to choose from so losing you isn't really that important to him or her.
In this case....the supplier has all the power.

Flip it around now.
You order soda from a supplier that has only you and one other business as customers. If you leave him or her, they are pretty much screwed because then they will lose half of their business.

In this case, you have the power, not the supplier.

You see, if you are one of many customers for a supplier, the suplier has the power, if you are one of a few customers for the supplier, you, the business, have the power.

3.) Current competition.

What's this?

Really, C'Mon!!!! Current competition! What does current mean? What does competition mean? Ok now, put them together. If you still need help...
Current competition is the people or businesses that you are in competition with, right now.

4.)Threat of new entrants

What does Mikey mean?

Well, you have current competition, those are who you are competing with right now. We covered that just a second ago. New entrants, however, is who else is going to come on by and also be your competition. Is there a threat for new entrants constantly, or are there barriers set up either by you or naturally? Are you easy to copy? These are only a few of the consideration when determining your level of threat for new people coming in trying to steal your market share.
Last but not least......

5.) Threat of new products

What does this mean?

This is beyond people copying you or becoming just regular competition, this is replacing you with something else.

A good example, where did beepers go???

If you remember beepers, they were used for paging people so that they knew that they needed to call you back.
Cellular phones came out and kinda made beepers useless. This is a perfect example for understanding how bad of a threat a new product may be. It may mean, extinction of your product!

These, my friends, are the wonderful additions to our knowledge of business competition Michael Porter bestowed apon us. Hopefully, we are all grateful that he figured out these forces to competition and shared it with us so that we are more capable of understanding what we will face in the business world. Thank you Mr. Porter!!

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By Maria