
When you’re running a small business, setting the right strategy can mean the difference between thriving and merely surviving. You don’t have the luxury of endless resources, so every decision counts. This is where Michael Porter’s strategic tools—Porter’s 3 Tests and Porter’s 5 Forces—come into play. These frameworks help you make informed decisions about where to focus your efforts and investments, ensuring you’re not just another player in a crowded market but a serious competitor with a clear edge.
Porter’s Three Tests—the Attractiveness Test, the Cost of Entry Test, and the Better Off Test—are essential when you’re considering expanding into a new market or launching a new product. These tests push you to think critically: Is this market truly attractive and profitable? What will it cost you to break in, and will it be worth it? And finally, will entering this market improve your overall business position? By evaluating these factors, you avoid costly mistakes and make strategic moves that are more likely to pay off.
On the other hand, Porter’s Five Forces—Competitive Rivalry, Threat of New Entrants, Bargaining Power of Suppliers, Bargaining Power of Buyers, and Threat of Substitutes—help you understand the dynamics within your current market. This analysis reveals the competitive pressures affecting your profitability and helps you identify opportunities and threats you might not have considered.
For small business owners like you, using these tools is not optional; it’s vital. They provide clarity, guide your strategy, and help you allocate your limited resources more effectively. With Porter’s frameworks, you’ll be better equipped to navigate competition, seize opportunities, and build a business that stands the test of time.
Michael Porter’s 3 tests for entering a new market.
When considering expanding your business or entering a new market, it’s crucial to avoid jumping in blindly. Michael Porter’s three tests—The Attractiveness Test, The Cost of Entry Test, and The Better Off Test—provide a solid framework to help you make smart, strategic decisions. These tests allow you to evaluate whether a new market is worth pursuing and if it aligns with your business goals.

- The Attractiveness Test: How Attractive is the New Market?
The first step is to assess the attractiveness of the new market. This isn’t just about how exciting the market might seem at first glance. You need to dig deeper to understand the market’s potential for profitability and growth. Consider factors such as the market size, growth rate, competition, customer demand, and regulatory environment.
For example, suppose you’re thinking of expanding your business to offer a new line of organic skincare products. The attractiveness test would have you look at trends in the skincare industry—Are more consumers demanding organic and natural products? Are there already well-established players that dominate the market, or is there room for new entrants? What’s the regulatory landscape like for organic products?
If the market is saturated with large, well-established brands and there’s minimal differentiation potential, it might not be attractive. Conversely, if you find a growing trend towards sustainable and organic products with a customer base eager for new, innovative solutions, the market could be highly attractive. Understanding these dynamics will help you determine whether it’s worth your time and investment.
- The Cost of Entry Test: How Expensive is it to Enter the Market?
Even if a market looks attractive, you must weigh the costs of entering it. This isn’t just about financial costs—though those are certainly important—but also the time, resources, and effort required to break into the market successfully. Consider factors such as initial capital investment, marketing and distribution costs, regulatory compliance, and the potential need to hire new talent or develop new expertise.
For instance, if you’re considering entering the technology sector with a new software product, the cost of entry can be substantial. You’ll need to invest heavily in research and development, acquire specialised talent, and potentially spend large amounts on marketing to gain visibility in a crowded space.
On top of that, if the market is heavily regulated, there could be additional costs for compliance. Compare this to entering a less capital-intensive market, such as offering a new consulting service within your existing niche. Here, your entry costs might be limited to marketing and some rebranding, making it a more viable option. The goal is to determine whether the potential returns outweigh these entry costs.
- The Better Off Test: How Will the Company Be in a Better Position?
Finally, you need to ask yourself whether entering this new market will put your business in a better position overall. This test examines whether there will be a synergy between your existing operations and the new market. Will you gain economies of scale, improved customer loyalty, enhanced brand recognition, or other strategic advantages?
Take the example of a restaurant chain considering expanding into the ready-to-eat meals market. If the company already has a strong brand and a loyal customer base, it could leverage these assets to sell ready-made versions of its popular dishes. In this case, the expansion makes the company “better off” because it can utilise existing resources, supply chains, and brand equity to capture a new revenue stream.
On the other hand, if the new market does not complement your current business or offers minimal synergies, it might not be worth the effort, even if it appears attractive and the cost of entry is reasonable.
Bringing it All Together.
By applying Michael Porter’s three tests—The Attractiveness Test, The Cost of Entry Test, and The Better Off Test—you’ll have a comprehensive framework for assessing new market opportunities.
These tests help you move beyond gut feelings or surface-level attractiveness and dig into the real potential for growth and profitability.
Remember, an opportunity that seems golden on the surface might not hold up under these rigorous tests. And that’s the point—to help you make informed, strategic decisions that align with your long-term business goals. So, the next time you’re faced with the option to enter a new market, put it to the test—the Porter test.
Michael Porter’s 5 Forces tests for assessing the competitive environment.
When you’re navigating the competitive landscape of your industry, it’s essential to understand the forces that shape it. Michael Porter’s Five Forces framework provides a comprehensive view of the competitive pressures that can impact your business’s profitability and growth. By applying these five forces—Competitive Rivalry, Threat of New Entrants, Bargaining Power of Suppliers, Bargaining Power of Buyers, and Threat of Substitute Products—you can better position yourself strategically in your market.

- Competitive Rivalry: Who Are You Competing Against?
The first force to consider is the level of competitive rivalry in your industry. This force looks at the number of competitors and their ability to undercut your business. When there are many competitors, or if they offer similar products and services, rivalry tends to be intense. This often leads to price wars, advertising battles, and constant product or service improvements.
Think about the fast-food industry. If you own a burger restaurant, you’re not just competing with other burger joints; you’re also up against pizza places, sandwich shops, and even healthier fast-casual options. To stand out, you’ll need a strong brand, unique offerings, or better pricing. Understanding this force helps you identify your unique selling points and develop strategies to differentiate your business.
- Threat of New Entrants: How Easy is it for New Competitors to Enter Your Market?
Next, consider how easy it is for new players to enter your market. If it takes little capital, there are minimal regulations, or there aren’t many barriers to entry, you could see new competitors popping up quickly. This force is especially crucial for businesses in growing or lucrative markets.
For example, if you run an online boutique selling handmade jewellery, the barriers to entry are relatively low. Anyone with some design skills and access to an e-commerce platform could start competing against you. To mitigate this threat, you might focus on building a strong brand, creating a loyal customer base, or developing exclusive partnerships that make it harder for newcomers to gain traction.
- Bargaining Power of Suppliers: How Much Power Do Your Suppliers Have?
Suppliers can influence your business significantly if they have strong bargaining power. If there are only a few suppliers for the raw materials, products, or services you need, they can dictate terms, prices, and availability. This power can impact your costs and, ultimately, your pricing strategy and profitability.
Suppose you’re in the tech industry, producing custom hardware products. If a few key suppliers control the critical components, like processors or screens, they can drive up your costs or limit your supply. To counteract this, you might explore alternative suppliers, negotiate better contracts, or even consider vertical integration by bringing parts of the supply chain in-house. Reducing your dependency on powerful suppliers can protect your margins and keep you competitive.
- Bargaining Power of Buyers: How Much Power Do Your Customers Have?
Just as suppliers can wield power, so can your customers. If buyers can easily switch to a competitor, or if they are large enough to demand lower prices or higher quality, they have significant bargaining power. This force is particularly strong in industries with many alternatives or where price sensitivity is high.
Take the airline industry, for example. Travellers have many options to choose from, and thanks to comparison websites, they can quickly find the cheapest fare. If you’re running a business in such an environment, you need to find ways to retain customers—whether that’s through loyalty programs, exceptional customer service, or unique product offerings. Differentiating yourself from competitors reduces the power that customers have over you.
- Threat of Substitute Products: Are There Alternatives to What You Offer?
Finally, you need to consider the threat of substitutes—products or services that can replace what you offer. The more substitutes available, the easier it is for customers to switch, especially if these substitutes are of equal or better quality, more convenient, or cheaper.
For example, if you operate a gym, your substitutes aren’t just other gyms. They include home workout programs, fitness apps, personal trainers, and even outdoor activities. Understanding this force means recognising all the ways your customers could meet their needs without using your services. To combat this, you could focus on creating a community, offering unique classes, or adding value through technology integrations like app-based workout tracking.
Bringing it All Together.
Understanding Porter’s Five Forces helps you take a strategic look at the competitive dynamics of your market. By examining each force—Competitive Rivalry, Threat of New Entrants, Bargaining Power of Suppliers, Bargaining Power of Buyers, and Threat of Substitutes—you can identify where your business stands strong and where it is vulnerable. This insight allows you to make smarter decisions, from pricing strategies to marketing efforts, and to build a more resilient business model.
So, apply the Five Forces to your business today. You’ll gain a clearer picture of your competitive environment and be better equipped to navigate the challenges ahead.
Final Word.
Small business owners can’t afford to make decisions based on guesswork or intuition alone. By applying Michael Porter’s 3 Tests and 5 Forces, you gain a structured approach to evaluating new opportunities and understanding your market dynamics. These tools help you identify where you can compete effectively, where you may face challenges, and how to allocate resources for maximum impact.
When you leverage Porter’s frameworks, you move beyond reactive decision-making to a proactive, strategic approach that positions your business for long-term success and profitability. Use these insights to craft a winning strategy and build a business that not only survives but thrives.
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