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In 1979, Michael Porter developed a tool to determine the attractiveness of a market/idea*. This analysis should be performed during the conception stage of idea development. Within each market lie five forces: Supplier Bargaining Power, Buyer Bargaining Power, Competitive Rivalry, Threat of New Entrants, Threat of Substitution. There are several aspects to consider for each of the five forces. Where possible, please try to answer each question in complete sentences.

Supplier Bargaining Power - The power of suppliers to drive up the prices of your inputs.

-How many suppliers are in your market?
-How expensive is it to acquire a new supplier?
-What is the average supplier profit margin?
-What is the ratio of fixed costs to variable costs for suppliers?
-How important is volume to the supplier?
-How would you rate the supplier bargaining power? Weak (3 points), Moderate (2), Strong (1)

Buyer Bargaining Power - The power of your customers to drive down your prices.

-How many buyers are in your market?
-What is the size of the average market order? In quantity and dollar value.
-How often do the buyers go to the market for orders in a year?
-How expensive is it to switch suppliers?
-How easy is it for buyers to locate a new supplier?
-How expensive is it for the buyers to create your product for themselves?
-What other products are available that could substitute for yours?
-What is the price sensitivity of your buyers?
-How would you rate the buyer bargaining power? Weak (3 points), Moderate (2), Strong (1)

Competitive Rivalry - The strength of competition in the industry.

- How different are your products from other competitors?
- Number of competitors?
- How fast is the market growing?
- What is the ratio of total market production to total market capacity?
- How much does it cost to get out of the market?
- How important is brand in the market?
- What are the total advertising dollars being spent per year in the market?
-How would you rate the competitive rivalry? Weak (3 points), Moderate (2), Strong (1)

Threat of New Entrants - The ease with which new competitors can enter the market if they see that you are making good profits and then drive your prices down.

-What are the barriers to entry to the market?
-How important is brand in the market?
-What are the capital requirements to enter the market?
-How would a new entrant get access to distribution?
-How steap is the learning curve?
-How would competitors retaliate a new entrant?
-What government policies might affect the entrant?
- How would you rate the threat of new entrants? Weak (3 points), Moderate (2), Strong (1)

Threat of Substitution - The extent to which different products and services can be used in place of your own.

-What is the likelyhood that a buyer would substitute the market’s product for another?
-What is the price of the substitute product?
-How expensive would it be to switch to the substitute product?
-How different is the sbustitute product?
-How would you rate the threat of substitution? Weak (3 points), Moderate (2), Strong (1)

An overall rating of 15 to 12 would indicate an attractive market/idea.
An overall rating of 11 to 8 would indicate a neutral market/idea.
An overall rating of 7 to 5 would indicate an unattractive market/idea.

*Porter, Michael. (1979) “How competitive forces shape strategy”, Harvard Business Review, March/April 1979.

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This entry was posted on Monday, April 23rd, 2007 at 5:41 am and is filed under Evaluate Ideas. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.