Analysis of Michael E.Porter's 5 Forces Model

Courtesy of Wikipedia

Michael E. Porter, the world's renowned financial guru from Harvard Business School, has devised The 5 Forces Model, as shown in the above figure. It describes the external effects on a business. This model can always be used anytime to gauge the strength of a business from external factors. Even before you start venturing into a new business, this model is useful in helping you to assess the risks and also other competitors in the industry.

Let's take my new childcare venture as an example and view its viability.

Force 1: The Bargaining Power of Customer
This defines the buying power of the customer. If my company is a small setup without a brand establishment, there is no pull factor for parents to send their kids to my centre. I have no bargaining power and parents/customers may demand to lower my fees or demand for certain things to suit their needs. As a result, I may succumb to their demands in order to keep them as customers. This may become a vicious cycle.


Force 2: The Bargaining Power of Supplier
But if I am part of an established brand like a franchisee, whose name has been established over the years and has the critical mass, is able to command certain premium in fees. Parents/customers have less power in influencing how fees are set or programmes are run. Because of its pull factor, parents may flock to sign up for their kids and waiting list may grow. In such cases, parents may even be nonchalant about fees hike.


Force 3: Competitive Rivalry within the Industry
In a saturated market, usually the customer is spoilt for choice with so many suppliers. Thus, your business may be forced to selling at low prices into order to sustain its market share. On the other hand, if your services are hard to find in the industry, it is most likely you have an upper hand in commanding prices.

Force 4: New Entrants
Lucrative markets may invite more new players to come in and compete. If the industry has high barrier of entry, it may discourage most new entrants. For example, in childcare business, there are many strict rules and regulations by various government agencies to safeguard kids' welfare. There is a long and costly process in getting these approved. This may deter many people without experience from entering the market. In a way, the market has rather a high barrier of entry.


Force 5: Threat of Substitute Products
Some parents have their kids' grandparents or maids to look after them. They may also send them to kindergarten's playschool. These are substitutes of putting children in a childcare.