Porter Model – Know Your Business Risk

Porter - LimePorter designed a model centred around various business risks. The risks are prevalent in every business to a greater or lesser extent.

The Porter model looks at five ‘forces’, being;

  1. Supplier Power
  2. Buyer Power
  3. Competition
  4. Substitute Product
  5. New Entrant Barriers

The idea of the model is that it gets you to think about where your business risks are. The Porter Model, also known as ‘Porter’s Five Forces’ addresses some business areas. It forms one element of analysing your business.

It is important to recognise that to make a Porter model worthwhile it needs to be updated on a regular basis. We would suggest at least quarterly. For larger companies then monthly may be more beneficial.

The Categories

Remember that as with any business model, you need to be critical of yourself, your business, and you need to give real thought to each section.

Supplier Power & Buyer Power

The reason we term these ‘power’ is that these sections are about influence. Buyer Power is about what influence your customers have over what you sell. If you are a restaurant then the buyer has significant power, they have choice, are fussy, are price sensitive and will judge you on your last meal. If you are Apple, then your buyer has less power. Everything for your i-pod, ipad, i-phone etc is all provided by Apple, therefore once you are in with Apple the buyer has a low level of influence.

For Supplier Power then think of how reliant you are on any one supplier, think of suppliers as anyone you are reliant on, such as-

  • Energy Companies
  • Materials Supplier
  • Cash and Carry
  • Key Staff
  • Broadband
  • Motor
  • Telephony
  • Finance

There are plenty more but for any supplier who is key then consider if there is an alternative, how easy it is to change and whether there is a cost to doing so.

Competition

Competition is fairly easy. It is who competes with you now. Remember to think wide on this one, your competition comes from many places. Consider them all.

New Entrants

New Entrants. This is about barrier to entering your industry. What would stop another competitor coming on the scene who could compete for all or some of your business. The barriers to entry may be-

  • For a restaurant then premises may be a barrier
  • For a legal firm then skills and qualifications would be a barrier
  • For manufacturing then equipment
  • For services then skills and contacts may be a barrier

For some businesses then barriers will be low. Just be honest here.

Substitute

Substitute is the most commonly misunderstood sector. This is about your product. About what you are selling whether that be service or tangible item.

An example of this could be-

  • Blu-Ray for DVD
  • Download for Blu-Ray
  • Take Away for Restaurants
  • Public Transport for Cars

Think of this as ‘what could someone buy instead of what I sell’, do not make the mistake of listing your competition. This section is about product.

The Porter model is about identifying gaps or risks in your business. It works very well in conjunction with SWOT as the two used together can provoke thoughts. You also start to see weaknesses in your business through Porter.

Given we are lovely people at Lime Consultancy then please download our Porter Template here – Resource – Porter and use it to benefit your business. When doing this, remember that many consultants will charge £100’s to access these guides for you, we are giving it for free.

If you have any queries with regard this article, or have any questions about using a Porter Analysis then please add your reply above, or contact us direct.

By David Farmer

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