COMPETITIVE ADVANTAGES: THE FIVE FORCES OF PORTER THE 5 FORCES OF PORTER ARE THE KEYS TO UNDERSTANDING AND EVALUATING THE COMPETITIVE ADVANTAGE Michael Porter's "Competitive Advantage" published in 1980 is an essential benchmark for business strategy. In this book, Professor Harvard provides the outline for understanding competitive behavior and the strategic positioning of a company within its industry. 1. Barriers to entry How difficult are new companies to enter the market? Better to be in an area with high barriers to entry.
An often mentioned barrier to entry is the initial investment required to be able to compete with historical market players. We think, for example, of the pharmaceutical sector, which requires colossal investments to develop new drugs. What's more, this development time is long, which further delays the time when the company can have any return on its investments.
This is also true in mass distribution. To compete with a Wal-Mart or a Carrefour on price, you would have to have their size up front in order to have the same bargaining power with suppliers.
2. The bargaining power of clients How easily can the customer go to the competition? It is better to operate in an industry where it is costly in time or money for the customer to leave you to go to a competitor. This makes it possible to pass any cost increases on to customers and preserve margins. Industry examples: Telecoms or software company subscription services
3. The bargaining power of suppliers What is the bargaining power of the suppliers? To control costs, it is better for suppliers to have low bargaining power. This is true in supermarkets, where the colossi use their size to dictate their terms to suppliers (farmers, food producers).
4. The threat of substitute products A company can be the best manufacturer of a product, but if it is easily replaced by a substitute, this can be a problem, especially if those substitutes are cheap. Example: bottled mineral water and tap water. 5. The intensity of intra-sector competition The above 4 factors allow us to study the intensity of competition in the business sector. Are companies fighting each other for little? Are industry players fighting to the death for a stagnant or declining market? Porter's
5 Forces can help us see if a company has a decisive competitive advantage that is difficult to replicate, what Warren Buffett called “moat”, or “moat”.