In 1979, Dr. Michael Porter, Harvard Business School, developed a model to analyze five forces that impact an industry’s competitive environment. His Five Competitive Forces analysis complements the SWOT analysis. Any business or industry can utilize Porter’s Five Forces structure.
Porter’s analysis helps business owners determine potential for profitability by determining if that industry’s competitive environment makes it attractive or unattractive.
- Low competitive forces provide attractive possibilities for profitability
- High competitive forces provide unattractive possibilities for profitability
How to Analyze Porter’s 5 Competitive Forces
Analyze each of the following five forces using questions and criteria found at the links listed as Other Sources of Information.
- Bargaining power of suppliers—The number and strength of suppliers affects their ability to establish or negotiate costs to your company. Fewer suppliers limits negotiation. More suppliers allows greater negotiation.
- Bargaining power of customers—The volume & concentration of customers affects how much they can impose pressure on your margins and volumes. High bargaining power forces you to lower margins. Low bargaining power reduces pressure.
- Threat of new entrants—The facility of new competitors to enter the industry affects the number of competing companies. Reacting to new entrants can reduce profitability.
- Threat of substitutes—How easily a competitor can substitute your product pressures you to lower prices. Think of the breakfast cereal market and Cheerios substitutes.
- Intensity of competitive rivalry—Intensity of competition between existing players also affects profitability. High competition lowers prices. Low rivalry allows prices to adjust. Consider the rivalry among cell phone manufacturers and it's impact on margins.
Others Sources of Information
Discover how use statistical, dynamic, or visual methods to analyze your findings and change pressures:
- Dagmar Recklies lists excellent criteria for instructions how to analyze and reduce each of the forces
- WikiCFO provides an excellent article explaining how to determine potential profitability, what makes an industry attractive or unattractive, plus strengths and weaknesses of Porter’s framework
- Purdue University Extension offers a great tool to help you assess and try to influence a change in each of the 5 forces.
I suggest you analyze the forces the affect your profitability using Porter’s 5 Forces.
Join me Thursday when we share how Downes’ Three New Forces strengthen Porter’s 5
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