Porter's Five Forces for Capital Seekers: How Investors Analyze Your Market
Porter's Five Forces for Capital Seekers: How Investors Analyze Your Market
If there is one strategic framework that EVERY investor knows and uses, it is Porter's Five Forces. Michael Porter developed this framework in 1979 and it is still the standard tool for industry analysis.
If you are unable to analyze your market through Five Forces, you will immediately lose credibility with family offices and VCs.
The five forces
- Competitive Rivalry:How aggressively do your competitors compete?
- Threat of New Entrants:How easy is it for a new player to come into your market?
- Bargaining Power of Suppliers:How much power do your suppliers have?
- Bargaining Power of Buyers:How much power do your customers have?
- Threat of Substitutes:Are there alternative solutions that replace your product?
Practical Framework: Evaluating Your Market
Competitive Rivalry: Low is good
- Low: Market is fragmented, many small players (good for startup)
- High: Market is consolidated, few big players (bad for startup)
Threat of New Entrants: Low is good
- Low: High Barriers to Entry (capital intensive, highly regulated, proprietary technology) (GUT)
- High: Low barriers (software, digital products, low capital intensive) (BAD)
Bargaining Power of Suppliers: Low is good
- Low: Many suppliers, interchangeable (GOOD – you have leverage)
- High: Few suppliers, specialized (BAD – you are dependent)
Bargaining Power of Buyers: Low is good
- Low: Many buyers, they are not interchangeable (GOOD)
- High: Few buyers, they are replaceable (BAD – price pressure)
Threat of Substitutes: Low is good
- Low: There are no good alternatives (GOOD)
- High: There are multiple alternatives (BAD – They are competing for the same dollars)
How to build a competitive moat
The best positions have a “moat” – a defensive competitive advantage:
- Proprietary technology (hard to copy)
- Network effects (the bigger the better)
- Brand & Reputation (customers trust you)
- Scale (cost leadership)
- High switching costs (customers would switch, but it's expensive)
In the pitch you should always argue that you can build a moat (or already have).
Klassische Quellen
- Porter, Michael (1979):How Competitive Forces Shape Strategy. Harvard Business Review.
- Porter, Michael (1980):Competitive strategy. Free Press.
- Porter, Michael (1985):Competitive advantage. Free Press.
Read alsoBCG matrixandSector analysis for family offices.
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