porter-five-forces

What Is Porter’s Five Forces And Why It Matters

Porter’s Five Forces is a model that helps organizations to gain a better understanding of their industries and competition. Published for the first time by Professor Michael Porter in his book “Competitive Strategy” in the 1980s. The model breaks down industries and markets by analyzing them through five forces:

  • Competition in the industry
  • Potential of new entrants into the industry
  • Power of suppliers
  • Power of customers
  • The threat of substitute products

Porter’s five forces is a business framework which can provide a qualitative assessment and come up with a corporate strategy“>strategy            

Breaking down Porters’ five forces

Competitive rivalry

This force examines the intensity of the competition in the marketplace. The competition is given by several factors such as barriers to entry, the bargaining power of buyers and suppliers, and the threat of substitute products or services.

Barriers to entry

Imagine operating in a business where anyone can become your competitor. This is a market where there is no high capital requirement to start a business, and there are no particular regulations in place to limit the entrance from new competitors. For example, in today’s world where anyone with internet access can create its blog or website with very few overhead costs, barriers to entry are very low, therefore the competition is fierce, and it is tough to keep the market share for too long.

Bargaining power of suppliers

This force studies the numbers of suppliers in the marketplace. Indeed, a smaller number indicates the power of those suppliers to dictate prices. A more significant number shows no power of those suppliers over price control. For example, Coca-Cola operates in a market where the suppliers are neither concentrated nor differentiated. Indeed, Coke ingredients such as caffeine and sweetener can be easily found in the marketplace. Therefore suppliers, in general, cannot control prices.

Bargaining power of customers

This is the flip side of the power of the supplier. Imagine a business where there are very few customers and switching between one supplier and the other is extremely easy. Undeniably, this gives total control to customers to set the prices they want. Going back to our previous example, Coke is very powerful to its bottler suppliers.

Threats of substitute products or services

This force examines how easy it is for customers to switch from a product or service to the other. For example, Coke is extremely powerful in relation to its can manufacturer. Indeed, competition among can suppliers is fierce. Also, the threat of substitution is very high. In effect, Coke can easily switch to plastic bottles.

Drawing conclusions

Having analyzed the factors that influence an organization through Porter’s five forces,  a company can draw conclusions on its corporate strategy“>strategy and integrate it with its business strategy“>strategy, to maintain a competitive advantage. 

Other companion frameworks to Porter’s five forces 

Other frameworks that you can use in conjunction with Porter’s five forces are:

Ansoff Matrix

ansoff-matrix
You can use the Ansoff Matrix as a strategic framework to understand what growth strategy is more suited based on the market context. Developed by mathematician and business manager Igor Ansoff, it assumes a growth strategy can be derived by whether the market is new or existing, and the product is new or existing.

Read: Ansoff Matrix In A Nutshell

SWOT Analysis

A SWOT Analysis is a framework used for evaluating the business’s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.

Read: SWOT Analysis In A Nutshell

Growth Matrix

growth-strategies
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).

Read: Growth Matrix In A Nutshell

Comparable Analysis Framework

comparable-company-analysis
A comparable company analysis is a process that enables the identification of similar organizations to be used as a comparison to understand the business and financial performance of the target company. To find comparables you can look at two key profiles: the business and financial profile. From the comparable company analysis it is possible to understand the competitive landscape of the target organization.

Read: Comparable Analysis Framework In A Nutshell

Business Model Canvas

business-model-canvas
The business model canvas is a framework proposed by Alexander Osterwalder and Yves Pigneur in Busines Model Generation enabling the design of business models through nine building blocks comprising: key partners, key activities, value propositions, customer relationships, customer segments, critical resources, channels, cost structure, and revenue streams.

Read: Business Model Canvas In A Nutshell

Business Experimentation 

business-experimentation
Business experiments help entrepreneurs test their hypotheses. Rather than define the problem by making too many hypotheses, a digital entrepreneur can formulate a few assumptions, design experiments, and check them against the actions of potential customers. Once measured, the impact, the entrepreneur, will be closer to define the problem.

Read: Business Experimentation

Speed Reversibility

decision-making-matrix

The speed-reversibility Matrix, by FourWeekMBA will help you understand how to allocate the resources based on the worst-case-scenario-test.

Read: Speed-Reversibility Matrix

Blue Ocean

blue-ocean-strategy
A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.

Read: Blue Ocean Strategy

BCG Matrix

bcg-matrix
In the 1970s, Bruce D. Henderson, founder of the Boston Consulting Group, came up with The Product Portfolio (aka BCG Matrix, or Growth-share Matrix), which would look at a successful business product portfolio based on potential growth and market shares. It divided products into four main categories: cash cows, pets (dogs), question marks, and stars.

Read more: BCG Matrix

AIDA Model

aida-model
AIDA stands for attention, interest, desire, and action. That is a model that is used in marketing to describe the potential journey a customer might go through before purchasing a product or service. The AIDA model helps organizations focus their efforts when optimizing their marketing activities based on the customers’ journeys.

Read more: AIDA Model

Pirate Funnel

pirate-metrics
Venture capitalist, Dave McClure, coined the acronym AARRR which is a simplified model that enables to understand what metrics and channels to look at, at each stage for the users’ path toward becoming customers and referrers of a brand.

Read more: Pirate Funnel

Other resources: 

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here

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