Porter’s five forces
Porter’s Five Forces is a tool that analyses the forces that work in opposition to a company being successful.
These forces are:
- Potential entrants – companies which could enter the same market and are a threat to the players already in that field
- Buyers – the customers of the business
- Suppliers – provide the company with the essential raw materials or services required to build a product or give a service
- Substitutes – alternative products that the company’s customers could buy instead of those the company provides
- Competitors – businesses which operate in the same market and are adversaries
What is it used for?
The model is used to better understand potential threats that may manifest themselves and to assess the balance of power in the industry. It can be used for strategic decision making – for example, to create a counteractive strategy against one or more of the competitive forces.
A company can also use this model to consider where it should strengthen its position: for example, by better leveraging the power that it has over its suppliers. Alternatively, it can be used to identify gaps in the marketplace and create products that might defend the company against a substitute or a potential entrant.
How do I use it?
Draw out the diagram on a page. Under each of the five forces, consider which most affect or threaten your company. Below are some of the questions you should consider.
- How loyal are your buyers? Could customers be easily persuaded away?
- What are the costs of entry for another business?
- What difficulties are there with entry, such as licenses or policies?
- What Economies of scale already exist that might deter potential entrants?
- How powerful are buyers’ groups?
- How many substitute products already exist?
- How easy is it for buyers to switch to an alternative product?
- How many companies are able to supply the raw materials or services needed to create your product or service?
- Are your suppliers well organised – for example, into an association or union?
- Can your suppliers provide your product directly to your customers or do they have to go through a third party?
- Is it easy to switch to an alternative supplier?
- How many substitute products are there?
- How important are the substitutes considered to be?
- Competitive rivalry can increase if one of the competitors is under threat from one of the other forces. Is this true in your industry?
- What indicators are there of increased competition?
What are its limitations?
Porter’s five forces model does not fully consider the power of alliances: those companies who work with one another in a synergistic way, but are not suppliers or competitors.
The model also assumes a relatively static market and does not fully consider the implications of market dynamics. The tool leads you to the general assumption that a new entrant is a bad thing, when actually the entry of a new company can shake up the marketplace and create more opportunities for everyone.
However, overall the model is useful in helping companies consider the industry in which they are operating.
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