There are many tools that can help you evaluate how a company is doing and help you predict how they will do in the future. In this unit, we present Porter’s Five Forces, SWOT Analysis, and the Broad Factor Analysis.
Porter’s Five Forces is a simple but powerful tool that can help assess the competitiveness of a business in their respective environment and evaluate the business’ potential profitability. This concept was developed by Harvard Business School’s professor Michael Porter and is highly regarded as one of the most prominent business strategy tools. Essentially, the goal of a business should be to build an “economic moat” by maintaining competitive advantages over its competitors and protecting its long-term profits and market share. In doing so, the business should focus on keeping Porter’s five competitive “forces” at bay, as it will help them ward off threats to their success and help them sustain their dominance.
The intensity of industry competition explains the competitiveness of the industry the firm is located in. Factors that raise the competitiveness include:
Decline in the demand conditions in the industry
High exit barriers
Excess capacity (market demand for goods and services is less than the productive capacity of the company)
Industry Structure (consolidated industries are most attractive because there are few firms to compete against for market share)
Industries with characteristics that protect the high profit levels of firms and prevent additional rivals from entering are most ideal. These factors lower the the threat of new entrants:
For both this category and the following category, minimizing the bargaining power of both suppliers and buyers is most ideal. Suppliers are powerful if:
In a similar vein to bargaining power of suppliers, buyers are most powerful when:
Threat of substitutes explain the threats of other products and focal industries in your business’ industry. Initially, this may be difficult to see clearly and can be easy to overlook. An example are the smartphones pushing the iPod out of the market. As more substitutes become available, the demand for the product becomes more elastic, and it limits companies from raising prices.
During a SWOT analysis, you evaluate the strengths, weaknesses, opportunities and threats that a company faces to evaluate whether they would be a good investment and fit for your portfolio. In other words, it can make you think about different factors which are important in their production and their relationship to consumers and raise red flags that you should be aware of.
Strengths
Think about what makes this company and their products unique or strong in the market. Their strengths can range from an innovative supply chain and materials to their brand, management, and how consumers see them. Strengths are what makes this company strong in its market and why consumers choose it over competitors. Think about strengths as things that are unique to your company, if every company in your sector is sustainable or offers good quality products then these are not your strengths. In other words, if everyone has the same “strengths” then it is a necessity in the sector and not really something that makes the company stand out.
Weaknesses
In this part, think about all that you did not think was strong about the company and what they should be doing better. If consumers now care about consuming more sustainable products, have they paid attention to this trend? If a consumer would buy a substitute from a different brand, why would they do so? Focus on anything that affects your costs, your service and your management.
Now, combine both what you have learned about the strengths and weaknesses. Think about aspects of the product and what the company can do to specialize or gain a bigger consumer base.
Threats are anything that can threaten your position in the market. To give a relevant example: do your supply chains break down during a pandemic or are you still able to access the products during hard times or extreme situations? Think of what factors can endanger the livelihood and the cash flows of the company. If the company is really leveraged, then think of risks relating to debt.
The Broad Factors Analysis, oftentimes also called PEST Analysis, evaluates political, economic, socio-demographic and technological factors that influence industries and sectors of the economy. Industries are always reinventing themselves, you can think of how the energy industry has changed in the past 50 years and it should be clear to you that change and innovation is the only constant in markets.
Political
You can think of political factors as anything from regulation and labor laws to trade policies, ease of doing business and the overall political stability. Other factors include taxes, subsidies, tariffs, corruption, and the current political leadership in a country.
Economic
The economic factors are usually related with R&D and prices companies and consumers face. Some examples include inflation, exchange rates, interest rates, and liquidity in the market. Anything that affects the ability of a company to borrow, lend, buy, and sell flows into this category.
Socio-Demographic
Not all populations across the world have the same population structure and you should take that into account when analyzing an industry in a specific country. If an industry targets the older population with their products their success might be different in Japan than in Brazil. If an industry targets the younger generation who are more concerned about the environment and social justice than industries and companies take this into account in their marketing and production. In other words, industries consider trends among people, which range from population growth and demographic information to public perception of different issues.
Technological
This includes the R&D that economic factors can influence. In other words, the technological factors that influence an industry include research and development in how businesses operate, supply chains, and advancements in their product and how society lives. For example, even if people can still send letters and track their delivery online, people might find it easier to send a text or an email. Thus, this factors also includes changes in behavior due to advancements in other sectors.