Competition is often viewed narrowly and identifies threats solely by today’s direct competitors. Porter’s Five Forces is a framework utilizing five competitive forces identify an industry’s potential strengths and weaknesses. This useful method determines threats to a business’s strategy for a defined industry structure. It can be applied to virtually any industry segment. Details: competition, opportunity landscape, and increases decision power to maximize a business’s long term profitability.
Originally developed by Harvard Business School professor, Michael Porter, in his book “Competitive Strategy: Techniques for Analyzing Industries and Competitors“. Utilize this method to analyze an industry’s structure to better facilitate corporate strategy in understanding short and long term profit potential.
The Five Forces,
- Threats of New Entrants: The potential for additional companies to enter market. Industries with a high barrier to entry will have a low threat of new entrants.
- Bargaining Power of Suppliers: Power exerted by suppliers in the form of price, volume limitations, shifting costs to customer
- Bargaining Power of Customers: Customers can have the power to influence price, quality, and services/features.
- Threat of Substitutes: A substitute performs the same function as the industry’s offering, but does so through differing methods.
- Internal Rivalry: Existing competitors have power to influence the market through advertising/marketing, price, research and development, new features, and more.
Steps to Running a Five Forces Analysis
- Identify the Industry and clearly define market definitions, value propositions, or jobs to be done. Clearly state where the industry “starts” and “stops”, the products and services provided by the industry, as well as the geographic boundaries of the industry – Regional/ National/ Global. There will likely be multiple, list out all that are relevant, especially to your businesses operation.
- List businesses or products that meet some or all of the before mention value propositions – this is your competition.
- For one of the identified offerings to be a true competitor, it must meet all of the market definitions. Revisit the market definitions and value propositions to determine which are present in today’s market. Then break out which are differentiating factors for your new offering. The goal is to individually categorize each of the organizations as a competitor, substitute, or not of concern.
- A competitor meets all of the value propositions, and a customer may chose either offering to suit their needs. (Think Netflix vs. Hulu)
- A substitute meets some of the value propositions, but a customer may still chose to elect a different service. (Think Netflix/Hulu vs renting/buying a movie)
- An offering is not of concern when greatly varying from the value proposition, meaning the offering is not in the target market. (Think Netflix/Hulu vs. reading a book)
- Examine the extent of internal rivalry, entry, substitutes, buyer power, and supplier power within your industry, indicating whether each of these forces represents a high, medium, or low threat to profits. In particular, for each force:Designate which contributing factors most directly impact your industry
- Identify potential metrics to serve as an indicator or predictor of each contributing factor.
- Assign 100 points across all of the contributing factors chosen within each force to designate relative importance.
- Indicate whether the overall force currently represents a high, medium, or low threat to profit.
- With each of the offerings categorized, examine in a table to clearly indicate how each performs. See the below table for an example. A table is also a great way to show how your offering differentiates itself!
- Examine each of the competitors using the five forces. How might each of the forces disrupt your entrant and growth within the target marketplace? Each of these forces are threats to the success of your operation and are important to recognize.
- Develop strategies to counter and mitigate each of these threats.
- The result of your analysis should be an assessment of potential profitability of the average firm within the industry. State each firm’s profit potential (E.G. high, medium, or low). Now, compare the profitability of your organization to the average firm’s estimated potential profitability. In terms of the five forces, how is your organization performing, better or worse, compared to the average firm?
- Develop and document strategies to address issues/concerns highlighted. The most effective strategies are those which are difficult to copy. For each strategy, include:
- Rationale for the strategy
- High-level capital expenditure (How much? For what? Why?)
- High-level human capital needs (How much? For what? Why?)
If there is a specific force for which you do not think it is necessary to develop a strategy, indicate why. Run each strategy by colleagues in the affected area to determine if this is something that is currently being worked. If not, what would have to change in order for the strategy to be adopted? Lastly, for forces involving stakeholder engagement, develop an Innovation Influence Strategy to align stakeholders to improve the success of your initiative.
For Help Identifying opportunities and Future Strategies,
Utilize the “How Might We…” form of redefining the problem. This brainstorming method is an effective tool to quickly identify opportunities and strategies. For more information on this method, see, the How Might We Post
To quickly brainstorm solutions to your new strategies and How Might We… statements, try the below brainstorming methods,
- Build Innovative Products & Ideas with SCAMPER
- Synectics – Ideation Through Flamboyant Scribbling
- Crazy 8’s – Rapidly Generate Creative New Ideas
Finally, take your best ideas and test them with your customers for quick feedback and iteration. Generate your MVPs (Minimum Viable Products utilizing fast prototyping methods.