Porter’s Five (5) Forces Analysis to identify competitive opportunities and attractiveness in any industry or market
Michael Porter (Harvard, Competitive Strategy 1980) developed the so called 5 Five Forces Analysis model to better identify factors that shape the character of competition, to assess the structural attractiveness and business value of any industry and to pinpoint strengths and weaknesses in a company.
In addition to and in combination with the SWOT analysis, the Five Forces model by Michael Porter provides another analysis tool to identify opportunities and risks when entering untapped territory in any industry or market. Porter’s Five Forces model, other than a SWOT analysis, provides clear action and thus does not rely solely on subjective judgment. If the actions that derived from the Five Forces model are synchronized with business requirements and goals it can become a substantial business driver in the competitive environment.
What is the Five Forces analysis?
Five Forces analysis model definition by Vernon Prior (The Language of Business Intelligence): “Five forces industry analysis helps to assess and manage the long-term attractiveness of an
industry. It is designed to explain the relationship between the five dynamic forces that affect an
industry’s performance; these are the:
• intensity of competitive rivalry;
• threat from new entrants;
• threat from substitutes;
• bargaining power of buyers;
• bargaining power of suppliers.
The Five Forcers Analysis model wants to identify what factors shape the character of competition within an industry.
Porter’s Five Forces model targets the assessment of the structural attractiveness of the analyzed industry.
Finally the Five Forces Analysis pinpoints strengths and weaknesses in a company and discovers opportunities or threats within the industry.
Assess the strength of each of the five forces affecting competition in the chosen industry. Assess the company’s position compared to the underlying causes of each force (see example: substitutes)
Devise a plan of action that may include:
1) Positioning the organization to provide the best defense against competitive forces
2) Influencing the balance of the forces through strategic moves and other pro-active measures
3) Anticipating shifts in the forces and positioning the organization and its goals and actions accordingly
Threat of Entry: Determinants
• Economy of scale
• Brand identities, marketability
• Capital requirements (raw materials, technology…)
• Access to distribution
• Absolute cost advantages
• Goverment policies, legislation
• Projected industry growth (fight for market shares)
• Fixed costs expectations (projected on forecasts)
• Brand identity
• Numerous competitors with equal power and resources
• Lack of differentation
Determinants of Supplier Power:
• Supplier concentration, density
• Switching costs, effort
• Forward integration threats
• Presence of substitute inputs (plus projected)
• Importance of volume to suppliers
Determinants of Substitution Threat:
• Buyer propensity to substitute
• Relative price of substitutes
• Switching costs, other barriers
Determinants of Buyer Power:
• Buyer concentration
• Buyer volume
• Ability to backward integrate
• Substitute products
• Price sensitivity (incl. perceived price value)
• Low profits
On top of the sheer Five Forces analysis there needs to be concise action as push back parameters when externall threats and risks are detected. Read more on some of the five forces push back strategies here.
Author: Jens Thieme
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