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 that can provide a qualitative assessment and come up with a corporate strategy.
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Breaking down Porter’s five forces
Porter’s five forces help, according to the author, to identify the attractiveness of an industry and whether this might be retained in the long run.
According to Porter, the industry’s attractiveness and competitive positioning (either through cost leadership or differentiation) can help a firm build a competitive advantage.
Competitive rivalry
This force examines the intensity of the competition in the marketplace.
Several factors, such as barriers to entry, the bargaining power of buyers and suppliers, and the threat of substitute products or services, cause competition.
All those factors combined determine the competitive rivalry within an industry and how attractive that is.
Some of the critical elements that Porter takes into account in his book, “Competitive Strategy” are:
Imagine operating in a business where anyone can become your competitor.
This is a market with no high capital requirement to start a business, and there are no particular regulations to limit entrance from new competitors.
For example, in today’s world, where anyone with internet access can create a blog or website with very few overhead costs, barriers to entry are very low.
Therefore, the competition is fierce, and keeping the market share for too long is tough.
The threat of forward integration is relative to the threat of backward integration by firms in the industry.
Bargaining power of customers
This is the flip side of the power of the supplier. Imagine a business with 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.
Returning to our previous example, Coke is mighty to its bottling suppliers.
According to Porter, there are two significant factors affecting the bargaining power of customers:
Bargaining leverage: perhaps how many buyers (concentration vs firm concentration there is in that industry). The switching costs for the buyer compared to those for the firm and how much information buyers have.
Price sensitivity: include price/total purchases, Product differences, Brand identity, Impact on quality performance, Buyer profits, and Decision-makers’ incentives.
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 mighty 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.
That includes
The relative price performance of substitutes.
Switching costs.
Buyer propensity to substitute.
Competitive advantage and competitive positioning, according to Porter
According to Michael Porter, a competitive advantage, in a given industry could be pursued in two key ways: low cost (cost leadership), or differentiation. A third generic strategy is focus. According to Porter a failure to do so would end up stuck in the middle scenario, where the company will not retain a long-term competitive advantage.
Are Porter’s five forces still relevant today?
Having analyzed the factors that influence an organization through Porter’s five forces, a company can draw conclusions on its corporate strategy and integrate it with its business strategy, to maintain a competitive advantage.
However, it’s important to highlight that the world has changed substantially since the 1980s.
And one force broke down the walls of Porter’s five forces: buyers’ information.
In today’s business world, a core factor flipped it upside down: data and information.
The Internet enabled many innovations.
And yet, at the business level, it helped companies get to know customers in ways that were not possible before (or at least it was not possible to mass customize marketing activities).
And it gave much more information to customers. Indeed, today the matter isn’t much about how much information customers have.
But instead, what information to ignore?
In an era of information overload, easy access to the web and its applications has given customers many options.
With more information on the side of customers, lower switching costs (you can access offers from several competitors in a few clicks), and platform business models, competitive advantages have turned much more inward.
Customer obsession goes beyond quantitative and qualitative data about customers, and it moves around customers’ feedback to gather valuable insights. Those insights start by the entrepreneur’s wandering process, driven by hunch, gut, intuition, curiosity, and a builder mindset. The product discovery moves around a building, reworking, experimenting, and iterating loop.
Porter’s forces might still be helpful as an exercise to analyze industries.
Yet, the faster you gather customers’ feedback, the more you will know whether you’re moving in the right direction.
Shorter product cycles, customer-centered frameworks, and lean methodologies have become the rule in this era.
Beyond the five forces and into the Six Forces Model
The Six Forces Model is a variation of Porter’s Five Forces. The sixth force, according to this model, is complementary products. In short, the six forces model is an adaptation primarily used in the tech business world to assess the change of the context based on new market entrants and whether those can play out initially as complementary products and as long-term substitutes.
Another important variation of Porter’s Five Forces Model is the Six Forces Model, where complementary products represent the sixth force.
This force was added throughout the 1990s, when different markets, especially in the tech industries, had been reshaped by innovations, which were seen by consumers as complementary products first, then replaced completely existing products.
Indeed, Andrew Grove, former Intel’s CEO and the father of the OKR Goal-Setting System, in his book “Only The Paranoid Survive,” highlighted how the sixth force – complementary products – was one of the critical forces that determined a complete reshaping of the way of doing business.
And therefore, one of the forces that most (especially in the tech industry traveling at a faster speed compared to other sectors) could change business models, leading to what Andrew Grove called a strategic inflection point.
A point from which the way of doing business would never be the same.
This could become both a significant threat for existing players and an opportunity for new entrants, but also a way for existing dominant players to redefine their business models completely.
That is why it makes sense, especially for companies operating in the tech business world, to map and analyze the context by adding this sixth force.
In his book, “Competitive Advantage,” in 1985, Porter conceptualized the concept of competitive advantage, by looking at two key aspects. Industry attractiveness, and the company’s strategic positioning. The latter, according to Porter, can be achieved either via cost leadership, differentiation, or focus.
In his 1985 book Competitive Advantage, Porter explains that a value chain is a collection of processes that a company performs to create value for its consumers. As a result, he asserts that value chain analysis is directly linked to competitive advantage. Porter’s Value Chain Model is a strategic management tool developed by Harvard Business School professor Michael Porter. The tool analyses a company’s value chain – defined as the combination of processes that the company uses to make money.
Porter’s Diamond Model is a diamond-shaped framework that explains why specific industries in a nation become internationally competitive while those in other nations do not. The model was first published in Michael Porter’s 1990 book The Competitive Advantage of Nations. This framework looks at the firm strategy, structure/rivalry, factor conditions, demand conditions, related and supporting industries.
Developed by American academic Michael Porter, the Four Corners Analysis helps a business understand its particular competitive landscape. The analysis is a form of competitive intelligence where a business determines its future strategy by assessing its competitors’ strategy, looking at four elements: drivers, current strategy, management assumptions, and capabilities.
The Six Forces Model is a variation of Porter’s Five Forces. The sixth force, according to this model, is the complementary products. In short, the six forces model is an adaptation especially used in the tech business world to assess the change of the context, based on new market entrants and whether those can play out initially as complementary products and in the long-term substitutes.
Other companion frameworks to Porter’s five forces
Other frameworks that you can use in conjunction with Porter’s five forces are:
Ansoff Matrix
You can use the Ansoff Matrix as a strategic framework to understand what growthstrategy is more suited based on the market context. Developed by mathematician and business manager Igor Ansoff, it assumes a growthstrategy can be derived by whether the market is new or existing, and the product is new or existing.
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.
First proposed by accounting academic Robert Kaplan, the balanced scorecard is a management system that allows an organization to focus on big-picture strategic goals. The four perspectives of the balanced scorecard include financial, customer, business process, and organizational capacity. From there, according to the balanced scorecard, it’s possible to have a holistic view of the business.
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.
The PESTEL analysis is a framework that can help marketers assess whether macro-economic factors are affecting an organization. This is a critical step that helps organizations identify potential threats and weaknesses that can be used in other frameworks such as SWOT or to gain a broader and better understanding of the overall marketing environment.
Businesses use scenario planning to make assumptions on future events and how their respective business environments may change in response to those future events. Therefore, scenario planning identifies specific uncertainties – or different realities and how they might affect future business operations. Scenario planning attempts at better strategic decision making by avoiding two pitfalls: underprediction, and overprediction.
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.
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).
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.
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.
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.
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.
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.
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.
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.
Andrew Grove, former Intel’s CEO and the father of the OKR Goal-Setting System, in his book “Only The Paranoid Survive,” highlighted how the sixth force – complementary products – was one of the critical forces that determined a complete reshaping of the way of doing business.
What is Porter's 5 forces model how different is it from a SWOT analysis?
Both frameworks are to understand the competitive business landscape. In comparison, Porter tries to understand the business landscape through five forces. A SWOT Analysis is a framework for evaluating the business’s Strengths, Weaknesses, Opportunities, and Threats. Porter’s five forces, comprised of the six forces model, is a great companion to the SWOT Analysis framework.
Why Porters five forces is outdated?
Porter’s Five Forces proved as a practical framework in the 1980-the 90s, when the business world looked quite different, and barriers to entry in many industries were much stronger. The current business landscape, made of Internet players, moves along more blurred boundaries. In that case, business modeling can address the current business landscape more effectively.
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).
That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.
In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.
A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.
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).
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
1 thought on “What Is Porter’s Five Forces And Why It Matters”
agree Vinay, it’s not easy also to predict what threats usually turns out to be these that really impact your business, but it’s a great exercise.