How to do a Porter 5-Forces analysis (with template and example)
Master industry competitiveness with Porter's 5 Forces model. Analyze forces, strategies & stakeholders effectively. Explore its dynamics now!
Contents
- What is Porter's 5 Forces Analysis?
- Why is Industry Analysis important?
- What are the 5 Forces of Industry Competitiveness?
- Example
- Template
- In Conclusion
What is Porter's 5 Forces Analysis?
Porter's 5 Forces model is a strategic analysis tool for analysing the competitive forces in an industry.
Why is Industry Analysis important?
Have you ever wondered why competitors in some industries always seem to struggle, while those in other industries seem to have a license to print money?
For examples, airlines, railways and utilities always seem to struggle. Tech companies, on the other hand, often seem to have a license to print money.
Industry analysis, using Porter's 5 Forces, can help to understand which industries are most likely to be profitable, and how businesses can position themselves within those industries.
What are the 5 Forces of Industry Competitiveness?
Competitive Rivalry: The Heart of Market Dynamics
Competitive rivalry refers to the intensity of competition among existing companies in an industry. A high level of rivalry can limit profitability as businesses may engage in price wars or increased marketing efforts. Understanding this force helps in strategizing on differentiation or cost leadership to stand out in a crowded market.
Factors to consider:
- Concentration & stability
- Industry growth rates
- Scarcity of resources
- Differentiation versus commoditisation
Bargaining power of suppliers: Balancing the Scales
Supplier power denotes the influence that suppliers have on the cost of inputs and the quality of products. High supplier power can restrict a company's profitability if there aren't many alternatives. Businesses need to consider strategies like supplier partnerships or diversification of supplier base to mitigate this risk.
Factors to consider:
- Extracting a higher margin
- Forward integrating: suppliers gaining control over and integrating with your competitors
- Firm:supplier concentration ratio
- Employee solidarity
Bargaining power of Buyers/distributors: Understanding your Customers' Influence
This force assesses how much power customers have to drive prices down. High buyer power, often seen in markets with many similar products, can influence companies to create more customer-focused strategies, enhancing loyalty and value.
Factors to consider:
- Price sensitivity
- Backward integration: customers gaining control over their supply.
- Switching costs
- Buyer:firm concentration ratio
Threat of new entrants: Guarding your Market Position
This force examines how easy it is for new competitors to enter the market. Barriers to entry, like high capital requirements or strong brand loyalty, can protect existing businesses. Understanding this can lead to strategies that solidify your market position.
Factors to consider:
- Industry profitability
- Barriers to entry (scale-based, relationship-based or legal)
- See also: A Taxonomy of Moats
Threat of substitutes: Keeping an Eye on Alternatives
The threat of substitution occurs when customers can easily switch to alternative products or services. Businesses must innovate and continuously improve to make their offerings more appealing and unique to reduce the risk of substitutes.
Factors to consider:
- Disruptive change
- Perceived level of differentiation
- Level of price/performance of substitute
- Ease of substitution (fungibility)
Some references add a 6th force, which may either be complementors, the government, regulators, disruptors or the public. In truth, you could extend the model to incorporate any significant stakeholder category.
When doing a Porter 5 Forces analysis, don't ignore that the various players may interact with each other. They could even collude. And they are likely to respond to strategic changes from the firm and from each other. The competitive forces in the 5 forces analysis may be constantly shifting. Game theory may help to uncover the likely patterns in such unstable competitive fields.
Example
This example 5 Forces analysis of the Airline industry helps to show why so many airlines struggle financially.
(Adapted from Michael Porter.)
Template
You could build your own 5 Forces analysis using StratNavApp.com. Gather and link your supporting evidence directly to your 5 Forces Analysis. Integrate your 5 Forces analysis into the rest of your strategic plan.
Where to find the 5 Forces Analysis in StratNavApp.com:
- Log In or Sign Up to StratNavApp.com
- Click "Analysis" on the Main Menu.
- Click "Insights" on the Drop Down Menu.
- Select "5 Forces" on the Selector at the top of the page that opens up.
In Conclusion
Porter's Five Forces model is a powerful tool for understanding your industry's landscape. By analysing these forces, you can develop strategies that exploit opportunities and mitigate threats, ultimately leading to a more robust business strategy.
Interested in diving deeper into strategic business analysis? Sign Up or Log In to StratNavApp.com for tools and resources that can help you apply Porter's Five Forces to your business strategy.
Resources:
- Essential Strategic Analysis Tools
- A case study - Porter's 5 Forces: John Lewis defends it supplier rebate demand
- Porter's 1979 Harvard Business Review article on How Competitive Forces Shape Strategy.