To develop rigorous management and marketing strategies, if the results obtained from SWOT analysis are deemed too simplistic, then you may consider utilizing Five Forces Analysis. The key to the success of well-known enterprises lies in applying Porter’s Five Forces Analysis to market trends. This article will guide you through understanding what Five Forces Analysis entails, analyzing the five forces involved, explaining the characteristics of this analytical model, illustrating how to draw a Five Forces Analysis diagram, and showcasing how PX Mart became the leader in the hypermarket industry.
What is Five Forces Analysis? An Advanced Introduction to the SWOT Analysis Model
Five Forces Analysis is utilized to assess the level of competition in the market, facilitating the formulation of the most suitable marketing strategies. It is a marketing framework based on SWOT analysis and was introduced by Michael Porter in 1979. Porter argued that SWOT analysis is overly simplistic and only focuses on the analysis of one’s own product and the capabilities of competitive products. To formulate comprehensive marketing strategies, Porter believed it essential to consider other factors such as potential competitors and the possibility of being replaced by similar products. Additionally, Porter’s Five Forces Analysis considers various variables that may affect the entire sales process, such as supplier behavior and consumer behavior. This analysis model can be seen as an advanced version of SWOT analysis, allowing for a deeper analysis of market conditions and precise analysis of the timing for companies to enter or exit the market.
What are the Five Forces of Five Forces Analysis? Detailed Analysis of Porter’s Five Forces
The product sales process includes purchasing raw materials from suppliers, manufacturing products, and selling them to customers. During the product sales period, there may be competition among peers, and there may be emerging industries following the trend of the times. Furthermore, concerns should be raised about whether there are other lower-priced alternatives currently available in the market. Therefore, assessing the level of market competition requires analyzing the bargaining power of buyers, the bargaining power of suppliers, competitive rivalry, the threat of new entrants, and the threat of substitutes. Below is a detailed explanation of Porter’s Five Forces Analysis:
Bargaining power of customers
The bargaining power of buyers is influenced by consumer behavior, including buyer concentration to firm concentration ratio, the total buyer volume and price of total purchase, bargaining leverage, buyer information availability, and buyer price sensitivity. With the widespread use of the internet, consumers can share product information or user experiences on forums or personal social media accounts, significantly increasing their bargaining power. In addition to observing product sales volumes, one can also check reviews and trends online to devise effective sales strategies.
Bargaining power of suppliers
Factors influencing the bargaining power of suppliers include supplier concentration, bargaining leverage，forward vertical integration, product costs, the uniqueness or rarity of raw materials, and presence of substitute inputs. This influence can be analyzed from two perspectives: product raw material selection and supplier selection. For instance, some products emphasize environmental friendliness and may choose environmentally friendly materials that are more expensive but align with the product’s characteristics. Alternatively, if located in an area with many suppliers, favorable raw material prices may be negotiated. Additionally, some suppliers not only provide raw materials but also offer product manufacturing services, thereby saving on transportation costs and time.
Competitive rivalry
The competitive rivalry includes the number of existing competitors, industry growth rate, product differences, diversity of rivals, and exit barriers. Before entering the market, one must observe and analyze the current market situation within the industry. This influence involves analyzing the advantages and disadvantages of one’s own products compared to those of other competitors in SWOT analysis. However, Five Forces Analysis requires further research on the industry’s growth rate and market supply situation, or ensuring significant product differentiation to surpass the current market situation. Otherwise, after investing a considerable amount of capital, discovering market saturation, exit barriers will also become more significant.
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Threat of new entrants
Threat of new entrants include access to distribution channels, absolute cost advantages, policies, and entry barriers. By analyzing these indicators, the number of future competitors and their sales policies can be analyzed. For example, if a particular brand already monopolizes the industry, this increases the entry barrier, requiring new entrants to spend more on attracting consumers’ consumption habits. Thus, the number of entrants may decrease. Conversely, if entry conditions are lowered and business forms are diversified, reducing entry barriers, this will attract new entrants to the market, such as industries with simple entry conditions like e-commerce.
Threat of substitutes
The threat of substitutes includes market prices of substitutes, consumer brand recognition, and consumer preferences. The threat of substitutes is closely related to consumer behavior. In addition to consumers’ own consumption preferences, market prices are also a key factor influencing consumer behavior. For example, if the price of raw materials for Coca-Cola increases, leading to a rise in market prices, consumers may choose to purchase Pepsi-Cola, a similar product.
What are the Characteristics of Porter’s Five Forces Analysis?
Compared to SWOT analysis, many businesses lean towards using Porter’s Five Forces to analyze market competitiveness. This preference arises because Porter’s Five Forces Analysis can comprehensively analyze future market trends, significantly enhancing its practicality. The following outlines two key characteristics of Porter’s Five Forces Analysis:
- Comprehensiveness: Five Forces Analysis conducts a comprehensive analysis of market supply conditions, encompassing not only existing and potential competitors but also suppliers and consumer psychology.
- Practicality: Porter clearly delineates the indicators of the five forces, enabling businesses to assess the impact of each external force. This analysis allows businesses to evaluate whether to enter the market based on current supply and demand conditions and to devise appropriate marketing strategies.
How to Draw a Five Forces Analysis Diagram?
The Porter’s Five Forces interact with each other, but special attention must be paid when drawing the Five Forces Analysis diagram. Porter’s Five Forces include four external forces and a fifth force composed of these four external forces. When drawing the Five Forces Analysis diagram, it is necessary to indicate the relationships between the five forces and the indicators of each force. Below is a demonstration of the Five Forces Analysis diagram:
Example of Porter five forces analysis: How PX Mart Became the Leader in the Hypermarket Industry
During its early establishment, most Taiwanese people preferred purchasing daily necessities from Carrefour or RT-Mart, which almost monopolized the market. Therefore, many believed that PX Mart would soon be unable to operate due to its monopolized customer base. However, to everyone’s surprise, PX Mart not only opened branches across Taiwan but also acquired RT-Mart in 2022. Now, it has replaced RT-Mart and Carrefour as the leader in the hypermarket industry. The following uses PX Mart as an example of Five Forces Analysis, detailing how PX Mart utilized Porter’s Five Forces to address market external forces and threats.
Bargaining power of customers：Marketing Strategy
For the same products, consumers tend to choose channels with lower prices for purchases. After observing consumer behavior, PX Mart decided to adopt a strategy of low-profit-margin, high-volume sales to attract consumers. Therefore, it frequently holds promotional activities. Additionally, PX Mart found that consumers increasingly demand a quality shopping experience. Consequently, it designed shopping routes and set up dining and rest areas to enhance the shopping experience.
Bargaining power of suppliers：Negotiation Leverage with Suppliers
With numerous branches established across Taiwan, PX Mart’s reputation continues to rise, and its source of funds has become more stable. These factors have given PX Mart a stronger negotiating position with suppliers. Furthermore, as PX Mart can wholesale large quantities of goods, this has also become a key factor in obtaining lower wholesale prices.
Competitive rivalry：Emulating Competitors
Currently, PX Mart’s existing competitors include various convenience stores. Although convenience stores have higher prices, due to their convenience and diverse services, some consumers still choose to purchase daily necessities from them. Facing the threat from existing competitors, PX Mart has also begun selling freshly brewed coffee, bread, desserts, sushi, etc. Additionally, it organizes activities such as point collection for gifts to stimulate consumer spending.
Threat of new entrants：Increasing Entry Barriers
The density of branch establishments has saturated the regional hypermarket market, raising the conditions for other hypermarkets to enter the market. This makes it more difficult to enter the market. Furthermore, PX Mart’s acquisition of RT-Mart is a powerful shock, putting immense pressure on new entrants. They must launch more attractive marketing strategies than PX Mart and have a certain amount of basic funds to establish a foothold in the market.
Threat of substitutes：Offering a variety of service formats
PX Mart’s substitutes may be online shopping platforms such as e-commerce. However, besides physical stores, PX Mart also allows purchases through online channels, enabling consumers to buy PX Mart products without leaving their homes. Members can use the PX Mart online shopping app, while non-members can also purchase through delivery platforms such as Uber Eats or Foodpanda.
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