Every business strives to prevent its competitors from stealing its profits. With today's fierce competition in almost every industry, it's not a question of if, but it’s a matter of how...
Porter's Five Forces is a simple but powerful tool that you can use to identify the main sources of competition in your industry or sector.
Key Takeaways
The Five Forces Model was created by Harvard Business School professor, Michael Porter and was first published in 1979.
Porter's Five Forces include:
- Competitive Rivalry,
- Supplier Power,
- Buyer Power,
- Threat of Substitution,
- Threat of New Entry.
- The model encourages organizations to look beyond direct competitors when assessing strategy and, instead, consider broader environmental forces.
- By understanding these forces, organizations can make more informed decisions, identify areas for improvement, and redefine their strategy to enhance and strengthen their competitive position in the market.
Advantages Of Porter’s Five Forces Model
- Organizations can learn how profit is divided among the five forces. It enables organizations to identify which players are in control and set rules.
- It provides company strategists with insight and a baseline to evaluate the company's strengths and weaknesses.
- It provides a holistic overview of any industry and helps strategists identify the most important factors that can affect their position in the industry.
- It helps strategists to think more comprehensively about the industry structure and discover non-obvious opportunities that can also attract higher investments and affect the company’s future growth.
Weaknesses Of Porter’s Five Forces Model
- Not putting in enough effort to discover and understand the ‘why’ behind observations.
- Lack of engagement with stakeholders during the competitive analysis can result in obstacles that could be prevented from the get-go.
- Not understanding the goal of Porter’s Five Forces Framework. The goal is to use insights to formulate a business strategy, not to declare whether the industry is attractive or not.
- Strategies fail because managers and strategists define the industry in which the competition takes place too broadly or too narrowly.
Porter argues that technology and innovations are fleeting factors that are not enough to make an industry attractive or unattractive.
To use the model, start by looking at each of the five forces in turn, and think about how they apply in your company.
The next step is to identify how your company is going to compete and formulate a competitive strategy.
Ideally, you want to sit in a position where you can balance the 5 Forces and maximize your profit. The key question to answer here is how you are going to achieve a competitive advantage that will put your organization in a winning position.
Porter developed three generic strategies that can be used to create a defendable position and outperform competitors. These strategies are:
- cost leadership,
- differentiation, and
- focus on a particular niche.
Here’s a quick overview of each:
Cost leadership is a strategy that focuses on reducing the costs involved in providing a product or service. By running a lean operation and reducing costs across different departments, you’ll maintain healthy margins and profits.
A differentiation strategy focuses on providing a product or service that is perceived as being unique and hard to replicate. Buyers won’t find anything like your product or service in the market allowing you to charge higher prices.
A focus strategy looks at serving a specific target market better than anyone else in this industry. By acquiring a deep understanding of your specific customer, you’ll be able to serve your customers more effectively and efficiently than the competitors who are working across the entire industry.
Which strategy is your organization working towards?
It’s not uncommon for organizations to successfully pursue more than one strategy, especially if your industry is growing and profitable.
However, as industries mature, the companies that are unclear about their strategy often see their profits dwindle. When companies fail to focus their efforts on any one of these 3 strategies they are, as Porter calls it, “stuck in the middle”.
If you are stuck in the middle, choose a strategy that is hardest to replicate and that is best suited for your company's strengths.
Before going into formulating your strategic plan, think about the metrics that you want to achieve and start building your plan backward from there.
Once you know those metrics, start crafting thehashtag KPIs, projects, objectives, and focus areas that you’ll need to work on to get to those key metrics you set. This is basically the process of creating your strategic plan.
IMPORTANT NOTE:
Porter’s 5 Forces model is an outside-in-facing tool that analyzes only external factors that impact a company’s profitability. You can do a comprehensive strategic analysis using additional tools and frameworks, like SWOTanalysis, PESTLE analysis, Blue ocean strategy, or Value chain analysis.
