Michael Porter developed a tool called the “Porter’s 5 forces” to help structure the analysis of market attractiveness. This can be used to understand potential markets, or existing markets. It’s important to understand both the forces that are acting on your business, as well as the opportunities for influencing them. Sometimes influence comes simply by changing your offering to generate competitive advantage, and in other cases it may act as impetus for actions like horizontal or vertical integration, lobbying for advantage with regulators, etc. It’s important to go further than simply talking about the forces, it’s important to create some form of rating in order to generate consensus building discussion.
This can be implemented at a market level, product category, or down to individual offerings, depending on what makes sense. While you don’t want to isolate your perspective to an internal view, there can be a lot of insight held within the collective minds of your teams. One way to generate data is to structure a stakeholder survey, with ratings, applied at the granularity you deem most relevant.
Here is a starting point if you choose to go down that road (below). Once you start generating this kind of data, you’ll probably want to continue the discussion into the future, because it’s essential to a lot of decision-making.
Sample survey methodology:
New Entrant Risk: The ease with which new competitors can enter the market if they see that you are making good profits (and then drive your prices down).
1. The barriers to other suppliers entering our market would be extreme from their perspective
2. The barriers to entry are high, but not insurmountable
3. The barriers to entry are moderate
4. The barriers to entry are minor, and act only as a mild deterrent
5. The barriers to entry are practically non-existent, it would be very easy to start competing with us
Buyer Power: The power of your customers to drive down your prices.
1. Buyers have no collective power over our pricing
2. Buyers have a minor degree of power over our pricing
3. Buyers have a moderate degree of power over our pricing; they can squeeze us a bit
4. Buyers collectively have a lot of power over our pricing
5. Buyers have power over our pricing changes through collective influence whenever they want
Threat of substitution: The extent to which different products and services can be used in place of your own. (this also drops both supplier power and the market attractiveness)
1. Clients have basically no substitutes for this product offering; they can neither get anything similar elsewhere nor replicate it in-house
2. Clients have less-than-ideal options for substitution, but they exist
3. Clients have some reasonable substitute options, ranging from doing it themselves to accessing the expertise in the different form
4. Clients have some solid substitution options that match our own value proposition
5. Clients have substitution options that could easily be perceived as better than what we provide
Supplier Power: The power of suppliers to drive up the prices of your inputs.
1. Suppliers have practically no control over input pricing, we can easily force the margins when we want
2. Suppliers have a bit of control over input pricing because of their strong reputation amongst limited suppliers
3. Suppliers have a reasonable degree of control over input pricing, and are in a position to occasionally negotiate in a healthy way
4. Suppliers have more control than we would like, and are effective in keeping the input prices reasonably high
5. Suppliers are in a dominant position, and have been able to successfully control the input prices higher than we want
Competitive Rivalry: The strength of competition in the industry.
1. There are very few competitors in our market, and their products are less attractive than ours
2. There are a few competitors than offer products, but they are generally not as attractive as ours
3. There are several competitors in the market, and their products are arguably similarly attractive
4. There are some significant competitors in the market, many of which have very attractive products and services
5. The competitors in our market are at least as strong as us, and their product offerings are equally attractive or more competitive