Porter's 5 Forces
Identifying the forces that shape the competitive landscape is a fundamental task for companies. But not only there, in interviews for product managers, competitors also play a role.
With Porter's 5 forces it is possible to have a structural first approach.
While Porter is offering a good starting point, in practice it is always a good idea to look left and right!
Threat of new entrants
When the industries yield high returns, it will attract new entities. A more competitive environment will lead to a decrease in profitability. To solve this issue incumbents make those entries more difficult via entry barriers. Otherwise, in perfect competition, the profitability will be zero.
Typical market entry barriers:
- economies of scale
- switching costs
- capital requirements
- customer loyalty
- brand equity
- distribution channels
- regulations or patents
Threat of substitutes
Substitutes solve the same economic need your product is, in a different way. Uber vs Lyft vs Taxi, AirBnB vs Hotels, Pepsi vs Coke ...
- Relative price performance
- Switching Costs
- Perceived level of product differentiation
- Number of substitute products
- Ease of substitution
- availability of close substitute
Bargaining power of customers
When the market has only a few key customers, those are sometimes able to pressure suppliers.
- Buyer concentration
- Degree of dependency upon existing channels of distribution
- Bargaining leverage, particularly in industries with high fixed cost
- Buyer switching costs
- Buyer information availability
- Availability of existing substitute products
- Buyer price sensitivity
- Differential advantage (uniqueness) of industry products
Bargaining power of suppliers
Is the product reliant on other products or resources, then the supplier has bargaining power.
- Supplier switching costs relative to firm switching costs
- Degree of differentiation of inputs
- Impact of inputs on cost and differentiation
- Presence of substitute inputs
- Strength of distribution channel
- Supplier concentration to firm concentration ratio
- Employee solidarity
- Supplier competition: the ability to forward vertically integrate and cut out the buyer.
How intense is the competition landscape.
- Sustainable competitive advantage through innovation
- Competition between online and offline organizations
- Level of advertising expense
- Powerful competitive strategy
- Firm concentration ratio