Porter’s Five Forces analysis

Within the Market Summary of your Marketing Plan it might be useful for you to include Porter’s five forces analysis. This is a framework for industry analysis that determines the attractiveness of an industry by helping you understand both the strength or your current competitive position and the strength of a position you are looking to move into. Developed by Harvard Business School professor, Michael E. Porter in 1979, the Five Forces analysis has some similarities with other environmental tools such as the PEST analysis, although the first one is more closely related to the company (microenvironment) by measuring how it can be directly affected in its ability to serve its customers and make a profit.
These 5 forces that affect your competitive strength can then be defined as follows:

• The threat of entry of new competitors - your strength is affected by the facility of other companies to enter your market as based on:

- economies of scale

- initial investment and fixed costs

- brand loyalty

- close customer relations

- switching costs for customers

- ease of customers to change provider

- the relative price for performance of substitutes

- ease of access to distribution channels

- learning curve advantages

- expected retaliation by competitors

- government action to new entries

• The threat of substitute products - your strength is affected by how easily available are there any other substitutes or complementary products that have either lower prices or better performance. This is determined by factors such as:

- price performance of substitutes

- buyer switching costs

- perceived level of product differentiation

- close customer relationships

- current trends

• The competitive rivalry - this force is many times determinant to define the industry competitiveness as high competitive pressure can result in changes in prices, margins and innovation for each individual company and for the overall industry. To determine the competitive rivalry the following should be analysed:

- number of competitors

- industry growth rate

- players strategies

- product differentiation

- barriers for exit

• The Bargaining power of suppliers - company suppliers may have a source of power over the company depending on how dependent the companies are from their suppliers. To analyse this force should be considered:

- number of available suppliers

- switching costs from one supplier to another

- threat of forward integration by suppliers

- presence of substitute inputs

- cost of inputs relative to the selling price of the product

• The bargaining power of customers - this force will define how much customers can impose pressure on margins and volumes. To analyse this, the following factors should be considered:

- cost of switching between product providers to the buyer

- the product's ability/ease to be replaced

- how strategically important is the product to the buyer

- possibility for the customer integrating backwards

- buyer concentration to firm concentration ratio

- bargaining leverage

- buyer information availability

Th Porter’s Five Forces model can be illustrated as below:


Each force should be analysed individually as only by identifying the strength and direction of each one, you can assess the strength of your company’s position and its ability to make a sustained profit within the industry.
To clarify how this can be done let’s look at an example:
“John Smith is tired of the high demands of his job at a financial firm in the City of London and is looking to start up a more relaxed business as an Internet cafe owner. To understand the potential benefits of entering this market he decides to make a Porter five forces analysis and classifies each force with one or more “+” (if the force is in his favour), “-“ (if the force is against him) or “0” (if the force doesn’t affect him) signs depending on how strongly the forces influence his business competitive position in the market. The result follows:

Porter’s Five Forces Analysis – Internet Cafe

Click image to enlarge

After conducting the Porter’s Five Forces for his potential new Internet cafe business, John decided to stick to banking while he thinks about a new business to get involved.”

What is the PEST Analysis?

It can be confusing to decide where to start when writing the market summary for your marketing plan. Exactly to simplify this process you can follow the PEST model, which will guide you on the four main areas of research you need to focus in order to conduct an appropriate research of the market and so that you don’t miss out on anything.

PEST is an acronym for Political, Economical, Social and Technological factors that will help you assess your business’ market. Such factors can have an impact on your business in the short or long term and both at a positive or negative level, hence why you need to analyse them properly.

Political factors – these include governmental legislation, tax policy, labour law, environmental law, trade restrictions, European or international legislation, regulatory bodies or processes, pressure groups, wars/conflicts, health & safety, data security or any other factors of political nature that might affect your business.

Economical factors – in this area you should consider the national and international economical current situation and trends, effects of inflation, market and trade cycles, market routes and distribution trends, seasonality or weather issues, interest and exchange rates. These factors might have significant effects on the way your business operates, particularly if you are planning to borrow capital from a lending institution or if you have plans of selling abroad, for example.

Social factors – these include from cultural society characteristics to lifestyle trends, demographics, education, ethnic and religious factors, ethical issues, consumer attitudes and opinions, consumer buying patterns, media views, fashion and role models, major events and influences, career attitudes or any other relevant social situation that might influence your business.

Technological factors – Such factors can have a serious effect on your business and on the way you conduct business as they can bring efficiency to your company, cost savings, influence the production levels or outsourcing decisions, for example. When analysing these, you should consider R&D activity, research funding, automation, competing technology development, associated/dependent technologies, maturity of technology, consumer buying technological mechanisms, technology legislation, technology licensing or intellectual property issues.

The above are the factors included in a PEST analysis and should be sufficient to make a proper analysis of the market where your business is involved, however, for certain markets it might be important to give further consideration to other market factors into more detail such as legal or environmental factors. In this way, there is, the so called extended PEST analysis that can be presented as follows:

PESTELI – Constituted by Political, Economical, Social, Technological, Ecological, Legislative and Industry analysis.

STEEPLED – Include Social, Technological, Economical, Ecological, Political, Legal, Ethical and Demographic factors.

A throughout market analysis using the PEST system will surely also help you identify the Opportunities and Threats of your SWOT analysis to conduct at a later stage in your marketing plan.

Think SMART when writing your plan!

Writing a marketing plan is not about getting out as many information as you can. Quite the opposite, you should consider only the important, relevant information to use in your document. After all, writing a marketing plan is all about thinking SMART! And by SMART, of course I mean intelligently, but in a structured way by setting up objectives and goals that can be Specific, Measurable, Achievable, Realistic and Time-Bound. So, let’s have a closer look at this structure to set out our marketing plan’s meaningful objectives:

Specific: What is it exactly that you want to achieve? Make sure you are concrete, action-oriented, focused and well defined in your objectives. To help you set up your specific objectives think of WHAT you are going to do; WHY is it important; WHO is going to do what; WHEN do you want this to be completed and HOW are you going to do it? You do not need to answer all these questions in one objective, but you need that overall, your total objectives do.

• “I would like to increase my company sales” – This is NOT a specific objective.
• “To increase company sales by 20% by the end of the year” – This IS a specific objective.

Measurable: Whatever your objective, you need to be able to measure when it was completed and how well it was completed. Only by quantifying your objective you will be able to understand how well it actually performed, if and how you need to improve it. After all, as it’s often stated “if you can’t measure it, you can’t manage it!”

In the example above, by adding the percentage of sales aimed at, this will provide you with a measurable target. If, in the mid of the year you realise that the company is still too far away from achieving the aimed objective, you can re-establish it to a more realistic one or, if the company is selling on target, by the end of the year it will be easy to measure whether the 20% increase in sales has actually been achieved or even got a surplus.

Achievable: Your objectives must challenge you and your company, however they cannot be too challenging or too far in time as this will lead to yours and your staff’s de-motivation. These should be attainable and action oriented.

Setting your company the objective of opening 15 branches in 7 different countries within 10 years time will be too far in time and too vague to actually motivate you, so this is not considered as an achievable objective.

Realistic: objectives might be achievable but not realistic if you don’t have the resources to get there in the specified time frame. You must carefully consider that you have all the resources such as people, skills and money in place that will be able to make you reach your aims realistically.

If you are a new business and set the objective of having a £1,000,000 turnover by the end of the year, this might be an achievable objective if you have an extremely innovative product that everyone will want. However, as a new business you might not have the people or the money necessary to make the investment to achieve such ambitious objective, therefore it won't be realistic.

Time-bound: Associate each objective to a time limit as this will prompt for action to actually achieve the purposed objective by the specified time. Setting yourself a deadline will create the important sense of urgency and will make it possible to actually measure the success of the objective.

The successful establishment of key objectives taking in consideration the SMART rules, will set the basis of your marketing plan and all its marketing actions to be equally specific, measurable, achievable, realistic and time-bound. Exactly what we are looking for in a GOOD marketing plan!

What is the extended Marketing Mix?

The original marketing mix concept, dating as back as the late 1940s, focused on 4 main tactical marketing tools that, when combined together aim to reach the company’s target market in the best possible way. These marketing mix variables are:

Product – either it is tangible or intangible, here the product you are selling will be analysed in detail in terms of its lifecycle, in terms of its product levels (core, actual and augmented – to be looked at in detail in a future post) and product market opportunities.

Promotion – Includes all the ways used to communicate, promote and sell your products either it is through advertising, sales promotion, public relations or personal selling.

Place/Distribution – Where and when your customers will be able to find your products/services, in which quantities and delivery times.

Price – Having the right price is very important to the success of the product and needs to be in-line with the overall marketing strategy, the product’s image and the market demand.

These 4 tactics are both applicable to tangible and intangible products however, services marketers have found there was a gap in their strategies when using the traditional marketing mix and verified to be more efficient to extend this model to include 3 additional Ps:

People – Everyone involved directly or indirectly in the delivery of a service is very important as they reflect the company’s image as perceived by the customer. As a result, service knowledge and appropriate training to all company members, are key factors for the company’s success.

Process – Processes are systems used within the company to assist in the service delivery. These can be processes for handling enquiries, orders, complaints, identifying customer needs or any others.

Physical evidence – It is related to all tangible, such as the decoration of the location where the service is being delivered, or intangible goods, such as past customers experiences, that help to communicate and deliver the service.

All variables together form the so called extended marketing-mix or the 7 Ps. They must be monitored on a frequent basis to ensure that the strategy is in-line with the market demand and consumer expectations, and the good combination of all 7 Ps will help marketers improve their results and marketing effectiveness.

The 80:20 rule (or the Pareto Principle)

You might have come across the 80:20 rule or policy (also known as the Pareto Principle) before, but do you really understand what it is all about? Basically it states that 80% of the effects come from 20% of the causes.
It emerged when an Italian economist Vilfredo Pareto verified that 80% of his country’s wealth was owned by 20% of the population. A few years later, the business management thinker Joseph Juran realised this principle could be applied to a broad set of work from the science of management to the every-day life.

• Project managers know that 20% of their work consumes 80% of their time and resources;
• Business managers know that 80% of their sales will come from 20% of their clients;
• Advertisers know that 80% of the enquiries will be generated by 20% of the advertising mediums;
  
• You know that 20% of your weekly activities represent 80% of your happiness;
  
• You spend 80% of your salary on 20% of things (such as rent, utility bills and transportation);
  

There are numerous situations where this rule can be applied, and even though it might not always be true, it is likely that it will still be a minority of actions that produce the majority of results. The way how the Pareto principle can be beneficial to a marketer is that it reminds you to focus on the 20% of activities that really matter and that will make the difference as they will produce 80% of your results. So if you will not have time to do everything you had planned to do, make sure you do not put aside any of the important 20% work that really matters. Work smart, not hard!

How can the 80:20 rule apply to a marketing plan?

It is crucial for a marketing plan to achieve the maximum impact; therefore it must be clear, concise and simple. It needs to concentrate on the 20% really relevant research and information to obtain 80% of its efficiency and consequently 80% of the business profits.

What is the difference between a marketing plan and a business plan?

Very often people can get confused with the two, but the fact is that the marketing plan (focused on the marketing strategy) will usually integrate a business plan (focused on the overall business strategy).
Your business plan is a decision-making tool that will cover a detailed insight into your industry, define your business structure, the product or service offered, your business goals, the people involved and the financials associated to achieve the referred goals.
Within the business plan there should always be included a marketing plan which will in turn, focus on the marketing strategy for the business.
A business plan will not be complete without a marketing plan; however, a marketing plan can be presented on its own. To understand more clearly what is included in each type of plan, please view each plan’s general structure below:

Business Plan Structure	Marketing Plan Structure
1. Executive summary	1. Executive Summary
2. Company description	2. Situation Analysis
3. Market analysis	3. Marketing Strategy
4. Marketing plan	4. Marketing budget and forecasts
5. Operations plan	5. Control and evaluation
6. Management team	6. Timeline
7. Financial plan	7. Attachments
8. Timeline
9. Attachments