Porter's Five Forces Analysis

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[edit] 1 Summary

The Porter’s 5 forces analysis is a framework for industry analysis and business strategy development. Five forces - bargaining power of customers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products -- combined with other variables to influence a fifth force, the level of competition in an industry.

[edit] 2 Why should you use it?

Competitive strategies (business strategies) are derived from an understanding of the rules of competition that govern an industry and determine its attractiveness. The ultimate goal of competitive strategy is to influence those rules in our own company’s favour. The tool that helps us to understand the different competitive forces that bear down on a business.

[edit] 3 Why has it been developed and who developed it?

The Porter’s 5 forces analysis tool was developed by Michael E. Porter in 1979.

[edit] 4 When should you use it?

Strategy consultants use Porter's five forces framework often to evaluate a company's strategic position. Porter's Five Forces model provides suggested points under each main heading, by which you can develop a broad and sophisticated analysis of competitive position, as might be used when creating strategy, plans, or making investment decisions about a business or organization.

[edit] 5 How does it work?

The rules of competition can be described by the five competitive forces:

1) Entry of new competitors into the arena

2) Threat from substitutes based on other technology

3) Bargaining power of customers

4) Bargaining power of suppliers

5) Competition between companies already established on the market

The threat of new entrants, perhaps attracted by the profitability or growth of this market, or possibly by the failings of the incumbents. The threat of substitute products or services replacing your offer, perhaps through new technology or a lower-cost alternative, or perhaps a ‚simpler’ solution. The bargaining power of customers, often reducing in numbers through amalgamation, and consequently increasing their buying power. The bargaining power of suppliers, sometimes through merger and consolidation, often through the provision of increasingly specialist, highvalue and unique services. Current competitor rivalry, each competitor jockeying for position through price, quality or service.

According to Porter, a company can identify its own strengths and weaknesses in relation to its industry by analyzing the forces that affect competition in the industry and their underlying causes. If you have a well-established position in a market then these forces will appear as threats, and so your response to the analysis should be: how do we build barriers to entry? If you are seeking to enter a market ? you are in fact the new entrant ? then analysing these forces will be done in search of gaps, or weak spots, that you can take advantage of. In both cases the objective is to gain competitive advantage. Porter identifies two main options for gaining competitive advantage, and these will be discussed in Chapter 13: a strategy of differentiation, or a strategy of becoming the lowest-cost supplier. Do Porter’s definitions matter? Competitor, new entrant, substitute ? aren’t they all just competitors? They matter because the purpose of the Porter analysis is to prompt your reaction to help you build an appropriate competitive advantage as a defence or offence.

[edit] 6 Related topics/tools

[edit] 7 links/sources

• Cheverton, Peter. (2004) Key Marketing Skills : Strategies, Tools & Techniques for Marketing Success. London, , GBR: Kogan Page.

• Karloef, Bengt. (2005) A to Z of Management Concepts and Models. London, , GBR: Thorogood.

• Porter, E. M. (1980) Competitive Strategy. Free Press, New York.