Porter’s five forces in digital marketing ; 1. Threat of substitute products or services, 2. Threat of new entrants, 3. Intensity of competitive rivalry, 4. Bargaining power of suppliers, 5. Bargaining power of buyers.
The next model worth reviewing is the five forces analysis model by Michael Porter. This is used to analyze the level of competition within an industry by utilizing industrial organization economics. The purpose is effectively to ascertain the competitive landscape and potential profitability of an industry. Any changes to these forces can directly affect an industry and the companies within it and so it is important to understand them and react to them in order to retain or gain competitive advantage. Michael Porter goes into a greater level of detail than we have space for here in his book Competitive Advantage, which has been used by students and businesses alike for many years in order to understand competition. Porter’s five forces are as follows:
Horizontal competition:
1. The threat of substitute products or services.
2. The threat of established rivals.
3. The threat of new entrants.
Vertical competition:
1. The bargaining power of suppliers.
2. The bargaining power of customers.
Threat of substitute products or services
This first force is the existence of another similar product in another industry. An example for the digital age might be landline phones versus mobile phones or, more specifically, mobile phones versus smartphones. Were a new smartphone to be launched those charges via a pod in the home and that has specific benefits for home use, it may attract customers who have always been landline users and so this is a substitute product threat to landline providers.
There are a number of factors to consider when determining if a product is a substitute threat according to this definition. Those factors are:
- Switching cost: if the switching cost is low then there is a high threat.
- Pricing: if the other product or service is relatively low in price then again the threat is high.
- Product quality: if the potential substitute product or service is of superior quality then the threat is high.
- Product performance: if the other product is superior in performance then the threat is again high.
What does this mean for digital marketing?
This threat is ever present in the digital age as companies continue to innovate. Tablets have threatened the laptop market and phablets have in turn threatened the tablet market. Holograms, drones and many others continue to impact on more traditional and established industries
Threat of new entrants
This threat is fairly obvious. A new entrant to a market can be direct competition and therefore threaten the success of an established business. There are many examples of this from the digital age, not least Google, Amazon, eBay and Twitter. Google entered the search market and quickly became the leader above many established players due to the accuracy and speed of the results. Amazon grew quickly, defeating more established players through excellent customer focus and introducing innovations in personalization that gave them a distinct advantage. Although eBay was not the first auction site it was very simple and easy to use. Finally, Twitter entered the social media space with a new micro-blogging approach that created a very simple method of sharing new thoughts and insights. It has been relatively easy for online-only businesses to enter many markets in the last 10 to 15 years.
Many of the old barriers, especially capital, have been removed.
Some of the factors that can dictate the threat of a new entrant are:
- Barriers to entry: for example patents, regulation. High entry barriers are attractive to established businesses as they stop new businesses entering easily. Also low exit barriers help businesses to leave the industry, which is also attractive. In other words, it is easy for your established competition to leave but difficult for new competition to enter.
- Economies of scale: new entrants are highly likely to be smaller than established businesses and so may not be able to profitably compete on pricing.
- Brand equity: established businesses have brand equity – a level of trust that comes with being a recognized brand. Although it is true that new entrants do not have this, it can be quickly established with significant above-the-line marketing spend.
- Industry profitability: if the industry is generally highly profitable then it is likely to attract a large volume of new entrants and vice versa.
- Government policy: there might be government policy in place that limits the ease with which new entrants can join specific industries.
There are many other factors such as location, expected retaliation, technology and distribution and these should all be thoroughly researched and understood in order for strategy to be robust.
Intensity of competitive rivalry
Competitive rivalry is one of the more commonly understood competitive factors and is sometimes considered the most dangerous. The distinct features and behaviours of your competition directly affect your ability to gain competitive advantage. Alongside digital transformation there are many other factors, including:
- The competitors themselves: the number of competitors and their relative strength are key factors. If your industry has no industry leaders the playing field is fairly level and so competitor rivalry is increased.
- High exit barriers: if it is difficult to get out then more businesses will stay in, even if they are only breaking even or even losing money. Competition therefore remains high.
- Slow industry growth: if an industry is growing fast then all players can grow through acquisition without necessarily directly affecting the competition. All those new customers can be shared out. If growth is slow then there are no more customers but just as many companies, so to grow you need to acquire customers from your rivals.
In markets where competitive rivalry is high, we move towards ‘perfect competition’ or in other words a situation where everyone competes at an even level with no ‘price makers’, only ‘price takers’. Price makers have the power to influence the price they charge, whereas price takers have no effect on the market. I would recommend more reading on Porter’s five forces and generally around economic theory to understand this in greater detail.
What does this mean for digital marketing?
There are many factors to take into consideration here and the recent trend towards modernization in the form of digital transformation is one of these. Moving your business into the digital age can be a slow and expensive process for established businesses. This can certainly create a change in the competitive landscape as younger businesses are more agile. On the other hand it is equally true that the larger businesses, which of course tend to be the more established (although not necessarily), can potentially invest money and resource into creating something at scale with advanced technology that may be less available to less established businesses. Digital transformation can gain you competitive advantage and therefore reduce rivalry.
Suppliers of products or services to companies are another factor in the competitive nature of an industry. The bargaining power of suppliers directly affects the ability for companies to make a profit and therefore compete. Strong suppliers are able to control pricing and product quality, which lessens a company’s ability to make profit. Weak suppliers on the other hand can be controlled or influenced more by the buyer and so the buyer can retain competitive advantage.
Some of the factors that can lead to high bargaining power for suppliers and therefore increased competition are:
- Few suppliers: if there are fewer suppliers than buyers then suppliers retain more bargaining opportunity.
- Buyer switching costs: if changing supplier is expensive then the advantage again lies with the buyer.
- Forward integration: if the supplier is able to produce the product or service themselves then again, they are in a position of strength.
What does this mean for digital marketing?
If you are running an e-commerce operation with physical products then you may be working with a wholesaler for the supply of your goods. It is possible that your supplier may be one of very few or the only supplier of the goods that you are retailing to your customers. In this situation the wholesaler has strong bargaining power as you have limited options. This can lead to an increase in costs and therefore your profit margin. This may in turn lead to a necessity to increase prices, which may result in a decline in sales. Should more wholesalers enter the market then the competition for your wholesaler increases, which passes some of the bargaining power back to you. Another option is to look at producing at least some of the products yourself in order to remove further power from the wholesaler.
Bargaining power of buyers
The bargaining power of buyers is the final force and is simply the ability of consumers to put pressure on companies to lower prices, change their products or improve customer service. Businesses can take a number of actions to reduce buyer power: for example, engagement strategies and loyalty programmes.
Some of the factors that influence buyer bargaining power are:
- Buyer concentration: if there are few consumers and many companies then the buyer effectively has their choice of company.
- Switching costs: as with most of the other forces, switching costs are a factor. If it is easy for a buyer to switch then they retain the bargaining power.
- Backward integration: if buyers can produce the products themselves then they again retain the power.
What does this mean for digital marketing?
One of the best examples of how buyer bargaining power has changed in the digital age is the increased use of social media and review sites to openly rate and discuss products, pricing and customer service provided by businesses. Many consumers will include reviews within their decision-making process and will not buy products that match their requirements if the reviews from their peers are negative. This has even extended to search engines with star ratings openly displayed within results for searches such as restaurants and products, which can increase or decrease click-through rates as a result. The power of the buyer has significantly increased since Web 2.0.
Brand or perceptual positioning map
It is useful to use a brand positioning map to develop your market positioning strategy for your products or services. These maps are not, however, built from your views of your marketplace but from the perceptions of consumers and so are sometimes called perceptual maps. These maps give a clear view, albeit a little subjective, of where your brand or products sit versus your competitors, thus highlighting any gaps in the market and demonstrating where there are areas of intense competition.