A company’s leadership closely watches certain factors before drawing up a marketing strategy. Although most of these factors draw on the external environment, some internal elements -- such as the organization’s financial soundness -- may affect the marketing blueprint. The five components of an external marketing environment are customers, suppliers, competitors, substitutes and entrants.
Corporate leadership factors customer aspects in strategic discussions to find new ways to satisfy the existing clientele but also to devise novel ways to attract new customers or convince the disinclined ones to do business with the company. Dissatisfied customers, a source of long-term operating losses, might resume business with the company if it changes its operational procedures, provides top-notch service and beats rivals’ prices. A customer-centric business strategy aims to align clients’ needs and desires with a company’s portfolio of products and services.
Suppliers play an essential role in the competitive landscape, providing organizations with the necessary raw materials to produce work-in process items and completely finished goods. In formulating a business strategy, company principals often must ponder the best way to cultivate ties with suppliers, and must think about proper methodologies to purchase top-quality goods affordably. For example, senior executives could wonder whether it’s better to have a single lead supplier in each country or whether it’s more advantageous to deal with multiple lead vendors.
A business rarely evolves in a commercial vacuum; therefore it must factor rivals in its marketing equation, unless the company is a monopoly. The presence of competitors often requires that a company organize itself around the most promising opportunities and segments, shying away from conventional structures that might mandate a commercial focus on a single industry or region. Simply put, the business must target sectors where it is more likely to make more money, make it quickly and expand in the long term.
A substitute product is an item that, at least partly, satisfies customers’ needs and desires. Clients use substitutes as replacement products, if -- or when -- original products are temporarily unavailable or inaccessible because of prohibitive pricing. A business must consider the threat of substitute products and services because these items typically whittle away at the organization’s profit potential. Consequently, management may set procedures to educate customers and make them savvier about the relationship between quality and price -- specifying plausible reasons why the company’s products are better than substitutes.
Paying attention to market entrants helps a company determine the sector’s penetration rate, which illustrates how easily another business can enter the industry. Reviewing entrant activities draws on competitive analysis because today’s new entrants might be tomorrow’s rivals, unless the newcomers quickly fade away thanks to the intense marketplace rivalry.
- California State University, East Bay; Michael Porter’s “Five Forces” Model; Tony Lima; February 2006
- Purdue Extension; Industry Analysis: The Five Forces; September 2004
- Graziadio Business Review; 5-Forces Industry Analysis; Karen Schnietz, et al.
- Developments in Business Simulation and Experiential Learning, Volume 26; Industry Analysis, Porter's Five Forces Model and Strategic Group Maps in the Business Strategy Game Simulation; Don M. Parks; 2009