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
- Clearly define market definitions, value propositions, or jobs to be done. There will likely be multiple, list out all that are relevant, especially to your businesses operation.
- A useful tool to identify the value proposition(s) for your initiative is the Business Model Canvas.
- 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)
- 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.