Today it’s the last part of our article to “The 3 keys tools of strategic analysis”, we’re going to talk about Porter’s Five Forces.
Porter’s Five Forces is a model developed in 1979 by Michael Porter, professor at Harvard Business School as a simple framework for assessing and evaluating the competitive strength and position of a business organization.
This theory is based on the concept following: there are five forces, they determine the competitive intensity and attractiveness of a market. Porter’s five forces help to identify where power lies in a business situation. This is useful both in understanding the strength of an organization’s current competitive position, and the strength of a position that an organization may look to move into.
Strategic analysts often use Porter’s five forces to understand whether new products or services are potentially profitable. To understanding where power lies, the theory can also be used to identify areas of strength, to improve weaknesses and to avoid mistakes.
Power of supplier
This their ability to influence the industry in terms of price and quality of products or services they provide. Indeed, an important supplier may impose higher prices if demand is only weakly sensitive to prices. What you need to know:
- Number of suppliers
- Size of suppliers
- Uniqueness of service
- Your ability to substitute
- Cost of changing
Power of buyer
An assessment of how easy it is for buyers to drive prices down. What you need to know:
- Number of customers
- Size of each order
- Differences between competitors
- Price sensitivity
- Ability to substitute
- Cost of changing
It’s all the operations that influence the benefit of industry players such as lower prices, product launch or intensive advertising. What you need to know:
- Number of competitors
- Quality differences
- Other differences
- Switching costs
- Customer loyalty
Barriers to entry
This is determined by the size of the barriers to entry in the industry. Indeed, the markets have a number of obstacles which do not facilitate the entry of a new business. What you need to know:
- Time and cost of entry
- Specialist knowledge
- Economies of scale
- Cost advantages
- Technology protection
Threat of Substitute
This the fact that a consumer needs can be met by several solutions (products or services). For example, the car can be a substitute for a train or plane. What you need to know:
- Substitute performance
- Cost of change
Over time, the Porter analysis evolved, it’s now called “5 + 1 Forces”, and the latter is the legal restraints imposed by the State. That refers to laws and regulations, standards, guides and guidelines. For example, in certain industries the number of company can be limited by licenses freed by the state. We can quote in particular the necessary license to be mobile phone operator with its own relay network in France.
Use the tool
To understand your situation, look at each of these forces one-by-one and write your observations on the Excel worksheet for example.
Brainstorm the relevant factors for your market, and then check against the factors listed for the force.
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 looking at things in this way helps you think through what you could change to increase your power with respect to each force. What’s more, if you find yourself in a structurally weak position, this tool helps you think about what you can do to move into a stronger one.