PORTER’S 5 FORCES
“I have been up against tough competition all my life. I wouldn’t know how to get along without it.”
– Walt Disney
Competition can come from anywhere, at any time. Are you and your organization ready? Do you know where more competition is going to come from? When? What are you going to do about it?
What is Porter’s 5 Forces?
Let the famous Porter’s 5 Forces, one of the cornerstones of competitive strategy, help you frame your existing and potential competition. Created by Michael Porter in 1979, Porter’s 5 Forces is one of the most useful frameworks to understand the current and future competitive intensity of an industry, which is driven by the dynamics of 5 Forces including the competitive rivalry within an industry, the power of suppliers, the power of buyers, potential new entrants, and substitutes. These 5 Forces not only drive the level of competitive intensity but also the profit and attractiveness of an industry.
Let’s go over the 5 forces in a bit more detail:
The bargaining power of buyers to drive down pricing and gain concessions from industry players, often denoted by the consolidation of buyers and/or transparency into competitive pricing and dynamics. For consumer product industries, Walmart, Costco, and Amazon are good examples of buyers who have grown and leveraged their buying power over industry.
The bargaining power of suppliers to drive up the cost of goods, limit goods, or bypass the market. Intel and Microsoft are good examples of suppliers with significant bargaining power within the PC industry.
The ability for customers of a market to substitute the market products or services with other products or services from another market. Digital cameras crushed the traditional film camera industry. And, now the digital camera industry is in rapid decline as people are substituting smartphones in place of digital cameras for their picture needs.
The threat of new entrants to come into the market can dramatically elevate the competitive intensity. The Apple iPhone was only introduced in 2007, 20+ years after the first cell phones came to market. Once the new iPhone hit markets, it dramatically turned the competitive dynamics upside down and all around. Imagine if Motorola, back in 1997 had realized the future of the mobile phone was merely a mini-computer in a phone and had bought Apple when they were worth $4 B, 250 times less than their valuation in 2018.
Beyond the four other forces, organizations have to face competitors in their market. Industry rivalry is a function of the competitive dynamics including, how many there are, how aggressive they are, how they conduct themselves, and how they differentiate themselves.
How do you conduct a Porter’s 5 forces analysis?
Conducting a Porter’s 5 Forces analysis is a helpful way to orient yourself within the competitive dynamics facing your industry. A Porter’s 5 Forces analysis, is more of a conceptual brainstorming analysis and is typically conducted utilizing a series of fundamental questions. Here are some of the best practices.
Assess the current competitive intensity of your industry. Ask yourself the following questions as you go through each of Porter’s 5 Forces:
– What is the growth of the industry? Are you growing faster or slower than average?
– What type of market share do you have?
– Are there more or fewer competitors than a few years ago? How many competitors?
– What is the average profit margin within the industry? The profit margin of your organization?
– How have competitors been acting over the past few years regarding innovation, pricing, capacity, practices, product lines, and advertising?
– Are there macro trends or regulations affecting the industry?
– Are there more or fewer buyers than a few years ago? How many buyers are there?
– What has been the behavior of buyers? Are they gaining leverage within the industry? How?
– What have been the trends with buyers as it relates to pricing, preferences, segments, and purchasing behavior? What effects have these trends had on the industry?
– Are there more or fewer suppliers and capacity than a few years ago?
– What have been the trends with capacity, quality, innovation, and costs?
– What has been the behavior of suppliers? Are they gaining leverage with the industry? Are they looking to move upstream? How?
– Who are the new entrants that have come into the industry over the past few years? How have they faired? Why?
– What are the new things they brought to the industry and customers? Are there elements that we need to emulate?
– What are the backgrounds and financing sources of the new entrants? What is motivating them to come into the industry?
– What are the alternatives for buyers to fulfill their needs, besides our industry?
– What are the impediments to and advantages of these alternatives versus our industry?
– What stops substitutes from coming into our industry?
Assess the future
After you assess the present and develop a good retrospective understanding of the competitive dynamics and intensity of your industry, then conduct the same exercise with the overlay of emerging and future trends and dynamics that will impact the industry over the next 5-10 years.
Understand the implications
Once you have a good understanding of the current and future competitive dynamics and intensity, you have to assess the impacts they may have on your company. And, develop strategies to either capitalize on or protect the company from the competitive dynamics.
Conduct the reverse analysis
An insightful but very little used analysis involves doing a Porter’s 5 Forces from the perspective of one or more of the power players the segments of buyers, sellers, substitutes, and potential new entrants. Taking one of the power player’s perspectives and doing a Porter’s 5 Forces often creates new strategic options and insights.
DOWNLOAD THE PORTER’S 5 FORCES POWERPOINT WORKSHEET
To get you going on a Porter’s 5 Forces analysis, download the free and editable KPI PowerPoint Worksheet.