Awareness of the five forces can help a company understand the
structure of its industry and stake out a position that is more
profitable and less vulnerable to attack. After watching the video about Porter's Five Competitive Forces That Shape Strategy, I became very interested in the issue and started searching for more information. I found this article in www.mindtools.com which explains the Five Forces in more detail and gives examples.
Assessing the Balance of
Power in a Business Situation
Porter's 5 Forces tool is a simple but powerful tool for understanding
where power lies in a business situation. This is useful, because it
helps you understand both the strength of your current competitive
position, and the strength of a position you're looking to move into.
With a clear understanding
of where power lies, you can take fair advantage of a situation
improve a situation of weakness,
and avoid taking wrong steps. This makes it an important
part of your planning toolkit.
the tool is used to identify whether new products, services or
businesses have the potential to be profitable. However it can be very
illuminating when used to understand the balance of power in other
How to Use the Tool:
Five Forces Analysis assumes that there are five important forces that determine competitive power in a situation. These are:
Supplier Power: Here you assess how easy
it is for suppliers to drive up prices. This is driven by the
number of suppliers of each key input, the uniqueness of their
product or service, their strength and control over you, the
cost of switching from one to another, and so on. The fewer
the supplier choices you have, and the
more you need suppliers' help, the more powerful your suppliers
Buyer Power: Here you ask yourself how easy
it is for buyers to drive prices down. Again, this is driven
by the number of buyers, the importance of each individual buyer
to your business, the cost to them of switching from your products
and services to those of someone else, and so on. If you deal
with few, powerful buyers, they are often able to dictate terms
Competitive Rivalry: What is important here
is the number and capability of your competitors – if
you have many competitors, and they offer equally attractive
products and services, then you’ll most likely have little
power in the situation. If suppliers and buyers don’t
get a good deal from you, they’ll go elsewhere. On the
other hand, if no-one else can do what you do, then you can
often have tremendous strength.
Threat of Substitution: This is affected
by the ability of your customers to find a different way of
doing what you do – for example, if you supply a unique
software product that automates an important process, people
may substitute by doing the process manually or by outsourcing
it. If substitution is easy and substitution is viable, then
this weakens your power.
Threat of New Entry: Power is also affected
by the ability of people to enter your market. If it costs little
in time or money to enter your market and compete effectively,
if there are few economies of scale in place, or if you have
little protection for your key technologies, then new competitors
can quickly enter your market and weaken your position. If you
have strong and durable barriers to entry, then you can preserve
a favorable position and take fair advantage of it.
These forces can be neatly brought together in a diagram like the
To use the tool to understand your situation, look at each of
these forces one-by-one.
Brainstorm the relevant factors for your market or
situation, and then check against the factors listed for the force in
the diagram above.
Then download our free
worksheet, mark the key factors on the diagram, and
summarize the size and scale of the force on the diagram. An easy
way of doing this is to use, for example, a single “+”
sign for a force moderately in your favor, or “--"
for a force strongly against you (you can see this in the example
Then look at the situation you find using this analysis and think
through how it affects you. Bear in mind that few situations are
perfect; however use environmental scanning as a framework for thinking through
what you could change to increase your power with respect to each
tool was created by Harvard Business School professor, Michael Porter,
to analyze the attractiveness and likely-profitability of an industry.
Since publication, it has become one of the most important business
strategy tools. The classic article which introduces it is "How
Competitive Forces Shape Strategy" in Harvard Business Review 57, March
- April 1979, pages 86-93.
Johnson is deciding whether to switch career and become a farmer - he's
always loved the countryside, and wants to switch to a career where
he's his own boss. He creates the following Five Forces Analysis as he
thinks the situation through:
This worries him:
The threat of new entry is quite high: if
anyone looks as if they’re making a sustained profit,
new competitors can come into the industry easily, reducing
Competitive rivalry is extremely high: if
someone raises prices, they’ll be quickly undercut. Intense
competition puts strong downward pressure on prices;
Buyer Power is strong, again implying strong
downward pressure on prices; and
There is some threat of substitution.
Unless he is able to find some way of changing this
situation, this looks like a very tough industry to survive in. Maybe
he'll need to specialize in a sector of the market that's protected
from some of these forces, or find a related business that's in a
Porter's Five Forces Analysis is an important tool
for assessing the potential for profitability in an industry. With a
little adaptation, it is also useful as a way of assessing the balance
of power in more general situations.
It works by looking at the strength of five important forces that affect competition:
Supplier Power: The power of suppliers to drive up the prices
of your inputs;
Buyer Power: The power of your customers to drive down your
Competitive Rivalry: The strength of competition in the industry;
The Threat of Substitution: The extent to which different
products and services can be used in place of your own; and
The Threat of New Entry: 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).
By thinking through how each force affects you, and
by identifying the strength and direction of each force, you can
quickly assess the strength of the position and your ability to make a
sustained profit in the industry.
You can then look at how you can affect each of the forces to move the balance of power more in your favor.
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