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Porter’s Five Forces

Quality Tools > Tools of the Trade > Porter’s Five Forces

 

In understanding how a company and its products may fare in a marketplace, Michael Porter has provided a simple five-element model to indicate areas companies in which investigate to understand opportunities and threats. A quality lens in each of these areas can help business managers further in identifying potential strategies.

 

 

1. Rivalry

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

 

2. Purchasing power of customers

When you have big customers and price competition, then your customers are likely to demand deep discounts. Just as you have professional sales people, they will have professional buyers who know how to negotiate. Big customers may also demand product innovation and customisation. When you have serious price competition, then quality improvement must focus on such as cutting product costs (eg. with parts reduction) and process simplification, whilst of course sustaining overall product quality.

 

3. Bargaining power of suppliers

Suppliers can also have power over you, particularly when the balance of supply and demand is tipping in their favour. If they are the only supplier of just one critical part, then they can hold up your whole process. You also need to manage supplier quality, of course, as it is possible they may let quality slip whilst boosting their profits, possibly at a long-term cost to everyone.

 

4. Threat of new entrants

To enter a new market can be quite expensive, but then new entrants often appear with special investment 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 if you are a market leader, driving quality up and costs down on a constant basis. You can also tie up suppliers and to-market channels, making it difficult for new people to get to these critical resources.

 

5. Threat of substitutes

The classic substitute competitor is of margarine for butter, a curve ball that farmers of the day 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, then your competitors are not just other coffee makers but all beverage sellers. If a person is looking for a drink, then beer, cola, tea and water may all be competitors, with any new drink like vegetable health drinks as relatively recent substitutes. The quality approach in understanding substitutes is to ‘chunk up’ to the higher purpose, for example where a car hire company considers ‘transport’ as the real benefit and thus considers the threat of bicycles to their business.

 

A sixth force that is often considered is ‘governments’, who can have a significant effect on companies and their competitiveness, for example 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.

 

Next time: The Four Ps

 

This article first appeared in Quality World, the journal of the Chartered Quality Institute

 

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