Porters Forces in Market Analysis
Porter's Five Forces Analysis - the Safe Way to Aquire Market Share?
Jun 1, 2008
Being diligent your first move in forming a strategy is to perform a full analysis of the market. Porter’s five forces method may not be perfect but it should be up to the job.
Marketplace Quantification
The analysis turns up the following –
- Bargaining power of customers – In this scenario, you find that the sources of supply are very limited, so the customer has little scope for negotiation.
- Bargaining power of suppliers – The supply position is dominated by one family of companies.
- Threat of new entrants –The market is ripe for competition and you intend to be the first to break ground. You take into account the fact that once you make headway, others will follow. You pitch your pricing accordingly. But, the first determinant of force under this heading is ‘Existence of barriers to entry’. You start to wonder why there are so few players in this game.
Only three steps in and the five forces analysis already indicates that the market may be effectively blocked for new entrants. The alarm bells started dinging in the back of your head as soon as you realize how narrow the competition is.
It’s not uncommon, major players always seek to protect their markets to some degree. A look back into recent history will show that many entrepreneurs faced this situation trying to break into diamond supply. Right up until 2004 one family of companies enjoyed a virtual monopoly.
The Diamond Market - An Historical Example
Between the years 2004 and 2006 the dominant De Beers group paid out 295 million US dollars in out-of-court settlements and agreed to modify their trading practices. This neutralized outstanding class actions relating to alleged antitrust violations and unfair trading practices. Yet, even today, they still effectively hold global dominance in the diamond supply markets.
Their commercial position was born from cartel methods of trading developed and practiced by the company group over more than 100 years; trading practices that endowed De Beers with so much marketplace strength that no one could ever break their hold. It required those trading practices to be challenged and changed before competition became feasible.
Even then De Beers didn’t stand still while it happened. Internal changes led to the launch of a joint venture with Moet Hennessy Louis Vuitton and a move to private company status in 2001.
Back Away or Forge Ahead? - The Big Question
The critical question is: when faced with a dominant competitor do you just walk away, or is there another approach? It all depends on how much effort you are prepared to make and over how long. Barriers of entry into the diamond supply market were eventually neutralized by threat of legal action, yet the dominant company group still holds on to a huge portion of global provision.
It has been said many times that the Porter five forces analysis is inadequate and many candidates for a sixth force have been nominated in order to return a more complete assessment of a given market.
Muscle, either defined as marketplace dominance, or muscle defined as resource and determination to break a competitor’s dominance, is clearly a worthy candidate for a sixth force in Porter’s analytical array.
One thing is certain: in entering the field of play, strategy must not only be well defined but flexible too.
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