For an organization to plan and execute its competitive strategy, it needs to understand its market and competitors.
Simple enough, but how do you “understand” your market and competitors? Porter’s 5 Forces Framework provides a methodology for doing so.
And while Michael Porter published his methodology in 1979, the principles it was built on are as relevant as ever today.
In this post, I’ll define the model, explain its use, and illustrate (with examples) what Porter’s Five Forces look like in practice.
Porter’s Five Forces Framework is a method for analyzing an industry to understand a business’s competitive position within that industry.
This framework is comprised of the following five forces:
The threats of new entrants or substitutes are horizontal competitive forces, meaning they come from outside the industry to increase competition for customers.
For example, the airline industry cedes customers to the competitive force of substitutes like cars, trains, and cruise ships. Similarly, new entrants to the airline industry reduce profitability by increasing competition for customers.
The bargaining power of customers and suppliers are vertical competitive forces, meaning they impact the value chain that flows from supplier to consumer.
Suppliers will always want to charge more and supply less and consumers will always want to pay less and get more. Understanding the bargaining power of suppliers and consumers, then, helps strategists find opportunities and threats.
The final force is competitive rivalry, which refers to competitive forces within the industry.
The following image illustrates each of Porter’s 5 Forces:
Porter’s model is a tool. Like any tool, it works best when it’s applied correctly.
To that end, the framework is meant to be used to analyze an industry, not an entire sector. Nor is it meant for analyzing smaller submarkets.
For example, imagine you lead strategy for Southwest Airlines.
In this case, you’d use Porter’s 5 Forces to analyze the airline industry, not the entire transportation sector, nor the private jet charter submarket. The transportation sector is too broad and the jet charter market too narrow for Porter’s model to generate useful insights.
According to Lumen Learning, at a high-level, Porter’s framework is used to:
Of course, Porter’s 5 Forces is not infallible. At the very least, though, it’s a useful first step for managers building or adapting a strategy. For example, this model could provide the underlying analysis strategists need to set useful objectives and key results.
To illustrate how you can apply this model, this section will paraphrase the Panmore Institute’s case study of Apple using a Five Forces analysis. This analysis focuses on Apple’s position within the smartphone industry.
Note that, while some analysts use a scale of one to five for each force, this analysis will categorize forces as strong, moderate, or weak.
Apple faces stiff competition because of the high aggression of rival firms, low differentiation between products, and the low cost of switching.
In other words, firms like LG and Samsung market their products aggressively. And their phones can do many of the same things Apple’s can. It’s also relatively easy for customers to switch from Apple to another brand, which makes competitive rivalry a stronger force.
The bargaining power of Apple’s customers is a strong force because of the low cost of switching and customers’ access to information.
The one thing that works in Apple’s favor as it relates to this force is the fact that customers are individuals. If customers had collective bargaining power, this force would be even stronger.
Apple has access to many different suppliers and the overall supply of Apple’s inputs is also quite large. Add to that the fact that there are many suppliers and relatively few smartphone sellers, and suppliers’ bargaining power is a weak force.
In Apple’s case, the threat of substitutes is low because, although there are some substitutes, they typically have inferior performance. For example, consumers could buy a camera to take pictures, but they’d lose the convenience of having the smartphone’s other features.
The capital requirements needed to build a brand that competes with Apple helps weaken this force. However, other large firms like Google have shown they can enter the smartphone industry. In other words, many large companies could become new entrants, making this a moderate force.
This case study of Apple using Porter’s model focuses the analyst's attention on specific threats for Apple. In this case, the strongest forces—and by extension the most important ones—are competitive rivalry, the bargaining power of customers, and the threat of new entrants.
In this way, Porter’s Five Forces Framework indicates where managers need to prioritize their efforts.
For example, due to the weak force of substitutes, it wouldn’t make sense to spend marketing resources on positioning Apple’s products as superior to its substitutes. But it would likely be worthwhile to explore ways in which Apple could erode the bargaining power of its customers.
If you want to put Porter’s 5 Forces Framework to use, it’ll help to have a template.
A final option comes from TopExcelTemplates which offers templates organized in an Excel spreadsheet.
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