Five Forces of Competition

Five Forces of Competition

These days, there are thousands of products available for any given purpose. As a business creating a new product, how do you know if your product can succeed?

One way to assess the potential success of your product is Porter’s Five Forces model.

The Five Forces model was developed by Harvard Business School’s Michael E. Porter in 1979, and it is still being taught in business schools everywhere.

According to Porter, profitability is determined by industry structure, which is shaped by the Five Forces. We will discuss each force using one of my brands that I recently sold Dawg Grillz as an example:  

Supplier Power. How easy is it for your suppliers to drive up their prices? That would depend on the number of suppliers of each key input, the uniqueness of their product or service, and the cost of switching to another.

The more supplier choices you have, the more power you have.

For Dawg Grillz, there are hundreds of suppliers who could manufacture the toys, and I could easily switch to another. Thus, my power relative to the supplier’s power is very high (out of five):

Buyer Power. How easy is it for your buyers to drive down prices? That would depend on the number of buyers, the importance of each individual buyer to your business, and the cost of them to switch to someone else.

The more individual buyers you have, the more power you have.

For Dawg Grillz, my customers are mostly individual buyers who order from me directly, versus a few big stores (e.g. Walmart) that could dictate the terms and squeeze my margin.

My power:

Competitive Rivalry. Do you have many competitors who can offer equally attractive products? Can your buyers easily go elsewhere?

If no one else can do what you do, then you will have tremendous strength.

While there are thousands of dog toys out there, there aren’t many that amuse the dog and the owner, so the competitive rivalry for Dawg Grillz is low, at least in the beginning.

My power:

Threat of Substitution. How easy is it for your customers to find a different way of doing things?

If substitution is difficult, then you will have more power.

For Dawg Grillz, the threat of substitution is very high. Instead of giving a dog a toy, one could give the dog a belly rub, a treat or a walk, for example.

My power:

Threat of New Entry. How easy is it for others to enter your market? That would depend on how much it costs in time and money to enter, if there are economies of scale, if there is protection for your key technologies.

Unless you are in the high-tech sector, threat of new entry is high for most products in this global marketplace. Strong branding can mitigate this. You want to establish that your product is the “original,” “the first,” “the one and only.” You see this with successful brands such as ShamWow and the Snuggie which, in theory, are very easy to copy.

If there are strong and durable barriers to entry, then you can preserve your favourable position.

The threat of new entry for Dawg Grillz is high. It is easy for a new business or an existing dog toy company to copy my design. The strong branding and the exposure from appearing on The Dragons’ Den helped counter that threat.

My power:

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Porter’s Five Forces model is a useful framework in analysing a business’s potential and identifying mitigating measures.

As Dawg Grillz has shown, a product does not have to be strong in every category in order to succeed, as long as steps are taken to counter the threats.

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