Porter's 5 Forces Analysis
When deciding whether or not to enter a new market, one analysis tool that may help is Porter’s 5 forces analysis. Porter’s tool looks at:
A business that is easy to get into has a high threat of new entrants. The more businesses that provide a particular service, the lower prices will be and the harder it will be to garner any significant market share. Blogging is a perfect example. Anyone with access to a computer and an Internet connection can get into blogging. The resulting competition makes it hard for people who are trying to make a living from blogging to gain any traction.
A business that is dependent on one supplier will find that the supplier has a lot of bargaining power. That means that the cost to produce items will be higher because the supplier will be able to charge whatever it wants for the raw materials that the business needs.
Buyers have a lot of bargaining power when the product is something that they do not need or can do without. If the buyers have formed a group or happen to be one large store like Wal-Mart, they can dictate the price that they want to pay. Wal-Mart has been known to squeeze suppliers if the store by telling them they can make up the profits in volume.
The threat of substituting something else for the product or service is also a concern. Entertainment takes into account a wide variety of activities. People may decide to order a movie online or go for a walk. They can watch a television show or see a professional sports team. They may play a card game or go to the cinema. All of these substitutes are in competition for the person’s time and resources.
Stiff competition where there are already companies vying for every micron of market share will make entry into the market very difficult. Unless the product or service has a way to differentiate itself from the competition, a new company runs the risk of not being able to make any inroads into the marketplace.
- The threat of new entrants
- The bargaining power of suppliers
- The bargaining power of buyers
- The threat of substitutes
- Rivalry among existing competitors
A business that is easy to get into has a high threat of new entrants. The more businesses that provide a particular service, the lower prices will be and the harder it will be to garner any significant market share. Blogging is a perfect example. Anyone with access to a computer and an Internet connection can get into blogging. The resulting competition makes it hard for people who are trying to make a living from blogging to gain any traction.
A business that is dependent on one supplier will find that the supplier has a lot of bargaining power. That means that the cost to produce items will be higher because the supplier will be able to charge whatever it wants for the raw materials that the business needs.
Buyers have a lot of bargaining power when the product is something that they do not need or can do without. If the buyers have formed a group or happen to be one large store like Wal-Mart, they can dictate the price that they want to pay. Wal-Mart has been known to squeeze suppliers if the store by telling them they can make up the profits in volume.
The threat of substituting something else for the product or service is also a concern. Entertainment takes into account a wide variety of activities. People may decide to order a movie online or go for a walk. They can watch a television show or see a professional sports team. They may play a card game or go to the cinema. All of these substitutes are in competition for the person’s time and resources.
Stiff competition where there are already companies vying for every micron of market share will make entry into the market very difficult. Unless the product or service has a way to differentiate itself from the competition, a new company runs the risk of not being able to make any inroads into the marketplace.