Porter’s five forces is a model that is used in the exploration of the environment in which a company operates to generate competitive advantage. The company management has a role of conducting porter’s five forces analysis of the smaller firm before the final decision is made. The model has five key areas that provide an understanding of competitive advantage of any company. These areas are entry’s threat, buyers’ power, suppliers’ power, substitutes’ threat and competitive rivalry or advantage. Through the analysis of these five areas, the level of competition within the smaller firm will be determined because these five areas determine the competitive intensity and therefore the attractiveness or profitability of the smaller firm. The five forces are very close to the firm and influence its ability to satisfy its customers and be profitable (Porter, 2008).
First, it would be important to analyze the smaller firm in terms of the threats to new entrants. Competition is affected by the possibility that new firms might enter the industry. For example, it is worthy asking if the industry in which this smaller firm is operating is capable of inhibiting additional rivals from getting into the market. For instance, if it is cheap in time or money to enter a market and compete effectively, if the economies of scale are few, or is minimal protection is given to a major technology, then it becomes easier for new competitors to enter the market quickly and weaken the position of the firm (Porter, 2008; Barney, 1995).
Another analysis that should be carried out concerns the power of the suppliers in relation to the smaller firm that the company wants to buy. For example, it is worthy determining if it is easy for the suppliers to drive the prices up, which is usually driven by the number of suppliers of every key input, the distinctness of the service or product, their control and strength over the smaller firm as well as the cost of switching from one supplier to the next. The smaller firm has many suppliers then it means that it is well placed in the market because it has more power over them (Porter, 2008). When analyzing the buyers’ power, it is important for the company to determine how easy it is for the buyers of the smaller firm it intends to buy to drive the prices down. For example, if it is established that the smaller firm deals with many powerful buyers, then it means that it is more able to dictate terms on them.
In the analysis of the threat to substitution, the company should determine if the customers of the smaller firm are able to find a different way of doing what it does for them. For example, if the substitution is easy and viable, then it means that the smaller firm intended to be bought has weaker power (Porter, 2008). Lastly and most importantly, is the analysis of the fifth area, which is competitive rivalry or advantage. The company should determine the number and capability of the smaller firm’s competitors. For example, if the smaller firm has many competitors that offer equally attractive services or products, it means that the firm has reduced power in the situation since the buyers and suppliers are most likely to go elsewhere in case the firm fails to offer them good deals (Barney, 1995).