If you’re looking to form a business plan, then perhaps you’ve heard of Porter’s Five Forces, as it’s typically used as a model to help businesses cover every corner of their plan. These five forces help act as a foundation upon which you can then build your business plan. But one needs to understand them to use them.
By using these five forces, you will see higher success rates and an increase in sales for your products or services. The five forces are as follows:
- Buyer power
- Barriers to entry
- Supplier power
- Threats of substitutes
Below, you will read through the five forces, one by one, so that you have a better understanding to be able to build your company’s business plan.
Porter’s Five Forces
Porter believed if you’re going to develop a strategy that’s going to work against your competition, and for you, then you need to come up with an effective strategical plan. To do this, you need to understand the industry structure at and as well as the competitive forces that you will be up against.
Therefore, he created the Five Forces, which will discuss below.
Understanding how much money your customers have is essential, as if they have low purchasing power, your sales will suffer. On the other hand, if they have high purchasing power, you will see a sales increase.
Barriers to Entry
An example of a barrier to entry would be a specific product. Let’s say that you sell workout equipment, and you crafted dumbbells. Since there are so many different companies offering your product, it’s going to be hard to move unless you made it unique.
When you get into the market, it’s crucial for you to understand the competition that you will be up against. You will have to more or less differentiate between the competition and the business so that you gain an advantage to increase profits.
One of the significant indicators of whether your business is going to be successful or not is how well you can rely on your suppliers. For example, if you have a supplier who keeps increasing their prices for certain materials, this is going to make it harder for you to gather the materials needed to create your products.
To compensate for the material price increase, you will need to increase your product’s price, which will affect your consumers. If your consumers can’t depend on you to keep things steady, you’ll start losing buyers quickly.
Threat of Substitution
Something else that can affect the sales you get for your business is other companies substituting your service or product. For instance, say that you build a company that specializes in creating custom trim for homes. If a competitor starts offering the same thing but with cheaper materials and prices, this is called substitution.
This is why it’s important to ensure you use quality materials yet have reasonable prices so that other companies can’t come and steal your products or services to sell.