A Porter’s 5 forces is carried out by analysing your company internal and external environment and comparing the perceived negotiation powers within your competitors, suppliers, customers and market. This analysis can be used as part of your SWOT, technology road mapping and business planning. Performing a Porter’s 5 forces analysis should be used in your strategic planning as it will aid your potential threats and gauge your power within the market place.
In our example we are a scale up who develops an Earth observation (EO) 6U cubesat. We are 8 years old with some venture capital funding that will give us a runway of 1 year and we have a small customer base looking to expand from universities and SMEs to government agencies and larger telecom companies. Other bits of information that we manufacture our satellite with traditional CNC milling with an external machine shop in Germany and we are based in a country in the EU. We want to expand into the East Asian and US markets.
Figure 1 Porter’s 5 forces
The Porter’s 5 forces (Figure 1) are as follows; Threat of substitute, Threat of new entry, Buyer power, Supplier power and Competitive Rivalry.
Threat of substitute:
Threat of substitute can be broken down in the following areas:
- Number of substitutes available
- Buyer ability to substitute.
- Relative price performance
- Perceived level of product difference
- Switch costs
There are plenty of companies who are supplying EO cubesats which can compete with our product therefore we should compare our rivals performance against ours. Is our differing performances unique enough for our customers to switch to our competitors or vice versa? How easy is it for our (or their customer) be able to switch to a different cubesat platform? Are our customers tied down to a contract? Is the cost difference a factor in our buyers? Substitutes don’t need to be an exact like for like, a substitute can even be a similar service but different technology. Can an equivalent EO mission be performed with a small sat, pocketqube, high alititude balloon or even a drone instead of cubesat?
Threat of New Entrants:
Threat of new entrants can be broken down in the following areas:
- Barriers of entry
- Economies of scale
- Brand loyalty
- Government policies (legislation)
- Access to distribution
- Switch costs
Is the East Asian and US EO market oversaturated? How easy will it be for us to enter these new markets and how easy is it for new competitors to enter the EU market? Are there new government policies within the EU that could cause problems in our operations and how can we adapt? How do these policies affect our competition and is there laws within the various East Asian countries and US make it difficult for us to enter? Does our order number of our satellites allow us to have our supplier manufacture our components at a lower rate? How easy is it for us to scale up production compared to our competitors. Would our academic customers remain loyal to our services or will be quick to switch to the new entrant? We could gauge our customer’s satisfaction with our services with feedback to determine if they would continue our collaboration.
Buyer power:
The strength and bargaining power of our customer base can be broken down in the following areas:
- Number of customers
- Size of each customers
- Price sensitivity
- Purchasing power of customer
- Ability to switch
- Uniqueness of competitors
We have a growing demand for EO missions therefore we have a large customer base which is also increasing. This means that in theory our customers don’t enough negotiating power for us to drop our prices. Our customers are universities and small companies therefore they can’t demand more services for lower prices. However, our potential new government and large telecom companies have enough clout and options to maybe cause issues with negotiating prices since we are a scale up and not a major EO satellite company. This could allow them to easily switch to a competitor as the financial constraints in switching is not a major hinderance to them. Our EO satellites have sensors that make our cubesat produce higher resolution images and more accurate pointing which helps us stand out with current EO cubesat manufacturers.
Supplier power:
The strength and bargaining power of our suppliers can be broken down in the following areas:
- Number of suppliers
- Uniqueness of suppliers
- Size of suppliers
- Company’s ability to switch
If we were manufacturing our satellite using a novel process, equipment, or material that very few suppliers can provide they could raise their prices easily and decrease our profit margin. This can be difficult to switch as this could lead to penalties or require redesigning our satellite to remain competitive. Our CNC milled components in Germany could easily be milled elsewhere in a CNC machine shop anywhere in EU with the cross-border trade deals with each EU affiliated country. However, our satellite uses a unique ADCS system that only has one major supplier in Japan which makes us vulnerable to price changes. This could also be a threat if the company ceases to exist.
Competitive Rivalry:
The strength and bargaining power of our competitors can be broken down in the following areas:
- Number of competitors
- Size of competitors
- Industry concentration
- Market size
- Market growth
- Brand loyalty
- Barriers to exit
There are multiple EO satellite companies in the market who are heavily committed within the industry. While the market is growing we have 3 major competitors with larger budgets than our scaleup. This means we are at risk of the cost of services and sales to drop and can be difficult to provide a competitive pricing advantage. We could potentially lose a customer to one of our larger competitors who can slash their prices in order to match ours. While we have smaller competitors, we are a small fish in a large pond. We should seek strategic partnerships with other bodies to help us differentiate ourselves from the market and to build a brand. The barrier to exit the EO market is high and require a lot of time and funds to develop our cubesat to cater other industries and missions due to how our manufacturing and strategic positioning has been set up.
As you can see in our example there are areas where we excel and can capitalise on but there are potential areas of concern we need to address in our strategy. These findings can be put into a SWOT and TOWS analysis to allow us to overcome any perceived obstacles. A template of the Porter’s 5 forces can be found in the link below: