Porter’s Five Forces of Competitive Position Analysis

What is it?

Michael E. Porter of Harvard Business School (HBS) used a simple framework for evaluating competitive strength. This was developed in 1979.  Strategic analysts often use Porter’s five forces to understand whether new products or services are potentially profitable.

Porter’s five forces of competitive position analysis:

  The five forces are:

1. Supplier power. An assessment of how easy it is for suppliers to drive up prices. This is driven by the: number of suppliers of each essential input; uniqueness of their product or service; relative size and strength of the supplier; and cost of switching from one supplier to another.

2. Buyer power. An assessment of how easy it is for buyers to drive prices down. This is driven by the: number of buyers in the market; importance of each individual buyer to the organisation; and cost to the buyer of switching from one supplier to another. If a business has just a few powerful buyers, they are often able to dictate terms.

3. Competitive rivalry. The main driver is the number and capability of competitors in the market. Many competitors, offering undifferentiated products and services, will reduce market attractiveness.

4. Threat of substitution. Where close substitute products exist in a market, it increases the likelihood of customers switching to alternatives in response to price increases. This reduces both the power of suppliers and the attractiveness of the market.

5. Threat of new entry. Profitable markets attract new entrants, which erodes profitability. Unless incumbents have strong and durable barriers to entry, for example, patents, economies of scale, capital requirements or government policies, then profitability will decline to a competitive rate.

Arguably, regulation, taxation and trade policies make government a sixth force for many industries

What are the benefits?

Five forces analysis help organisations understand the factors affecting profitability in a specific industry. It could help in making better decisions; whether to enter a specific industry; whether to increase capacity in a specific industry; and develop competitive strategies.

Actions to take	Actions to Avoid
Use this model where there are at least three competitors in the market Consider the impact that government has or may have on the industry Consider the industry lifecycle stage – earlier stages will be more turbulent Consider the dynamic/changing characteristics of the industry	Avoid using the model for an individual firm; it is designed for use on an industry basis

Reference

CGMA, www.cgma.org/resources/tools/essential-tools/porters-five-forces.html