Any business in today's world needs to know its industry and competitors when playing at the top level. One of the tools that help a business do so is Porter's Five Forces. Essentially, this is a tool to assess the level of competition for an industry in general and make better business decisions.
What are Porter's Five Forces?
Porter's Five Forces is an innovation framework and a strategic map created by famous business guru Michael Porter. It helps businesses recognize the forces that shape the competition in their industry. Understanding these forces plays a major role in helping companies identify existing opportunities, steer clear of possible risks, and subsequently make better strategic decisions.
How Does Porter's Five Forces Work?
This tool examines five key forces that essentially determine the competitiveness of an industry. Let's closely inspect how Netflix makes use of Porter's Five Forces to be a leader in the streaming game:
Threat of New Entrants: High
The entry of new firms into the industry increases competition. For example, Disney+ and Apple TV+ have recently entered the streaming industry, and Netflix now competes with them in the market. Netflix continues to stand at a dominant position by always having constant innovation in the form of original production or enhancement of the user experience.
If it is easy to enter any industry, the existing firms will be required to maintain their uniqueness to be in a good position to compete effectively.
Bargaining Power of Buyers: Moderate
This force deals with the power of buyers. The greater the number of alternatives available to buyers in an industry, the greater the power of those buyers is. In the case of Netflix, though individual subscribers do not have much power, content creators and studios do. Netflix thereby reduces this dependency by investing in its own content so it can get hold of more control.
Any business in which customers have lots of choices, companies have to offer special services or deals to them to keep them loyal.
Bargaining Power of Suppliers: Moderate-High
Suppliers hold power when they are able to control resources which the company needs. In the case of Netflix, Internet service providers control bandwidth, which is essential for streaming. Netflix manages this via in-house content delivery networks that ensure a seamless experience for their viewers.
In other industries, firms can weaken supplier power by having more than one supplier or investing in their own resources.
Threat of Substitutes: High
Substitute products or services are those that provide a different solution to a customer. To Netflix, video games or social media, for instance, are other forms of entertainment that the customers can use instead. Netflix combats this force by offering such a wide range of content that there is something for everyone.
Alternatives need to be known by businesses, and they must keep their customers with something unique.
Intensity of Rivalry: High
This force relates to the measure of the intensity of the competition within the organizations in the industry. As far as Netflix is concerned, the streaming market experiences high rivalry due to the existence of competitors like Hulu, Amazon Prime Video, and Disney+. Netflix has managed to stay different in its approach by going global and pushing new quality content able to ignite interest in audiences.
In highly competitive markets, businesses are forced to keep coming up with new ideas continuously to be differentiated from others.
Applying Porter's Five Forces for a Restaurant: An Example
Let's now take the example of a local restaurant and see how it can apply Porter's Five Forces to conduct this competitive analysis:
Threat of New Entrants: High
New restaurants can easily open in the area, increasing competition.
To differentiate, the restaurant can offer unique menus; for example, specialty items not found in most other places, or through providing a unique restaurant experience which would attract clients.
2. Buyer Power: Medium
A customer has a multitude of choices on where to eat. If the price in the restaurant is too high or the food quality is not good, a customer can quickly shift to another restaurant.
To retain customers, a restaurant can put in place a loyalty program or extend offers to its frequent customers.
3. Bargaining Power of Suppliers: Medium
A restaurant depends on the suppliers to obtain fresh produce. When a supplier pushes the price up, the restaurant's costs are affected.
A restaurant can tackle this by entering long-term agreements with the suppliers, or get supplies from different vendors in order to stabilize its prices and supply.
4. Threat of Substitutes: High
Customers may choose to cook at home, order take out, or dine at a different restaurant such as a fast food restaurant.
For this, the restaurant can provide seasonal menus and other events to keep customers coming back.
5. Intensity of Competitive Rivalry: High
There could be high rivalry in the sense that many restaurants within the vicinity serve the same types of food.
For a restaurant, setting itself apart can range from exemplary service and a good ambiance to a signature dish that is scarcely found anywhere else.
Ready To Utilize Porter’s Five Forces For Your Business Strategy?
Porter's Five Forces remains an important tool in analyzing competition within any industry. Understanding the five forces, companies then stand a chance of making informed decisions that will enable them to remain competitive and successful.
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