Porter assumes there are 5 important forces that affect your strength and competitive power in any business relationship.
Before you can aim your product at a market, first you need to understand your strengths and weaknesses with a swot analysis then look at how your external environment effects your business idea with a pest analysis.
The key then is to understand where you can gain a competitive advantage over your rivals by understanding your external market.
Porters 5 Forces are a tool used to understand competition in your market they are;
Looks at how easy is it for suppliers to drive prices up or when there is a lack of alternative suppliers your lack of ability to change supplier.
Looks at how easy is it for buyers to drive prices down or go to a different supplier.
looks at how strong your competition is, this is dependent on the number of competitors and their capability of doing what you do.
If there’s nobody else who can do what you do you’re in a pretty strong position.
Threat of Substitution
Looks at how things can be done differently, or how a different product can replace your own.
If your product is the only one you are in a strong position.
Innovation therefore creates risk to you or will create competitive strength if you can innovate.
Threat of new Entry
This looks at how easy it is to be a competitor, your power is maximised by having barriers or cost to prevent entry to your market.
When these barriers are taken down your competitive power is reduced.
Understanding where you can gain a competitive edge in your marketplace, this is one of the keys to success as a competitive advantage fundamentally effects your ability to deliver your business plan.