It’s time to continue our strategic planning series, as we look at the variety of tools that are available to companies when they progress their strategy. This time, we turn our attention to Porter’s Five Forces.
As we said before, these tools are not a strategic method in their own right, but they do add value as part of a strategic methodology such as the Intrafocus Strategic Planning Process (SPP), which you can see here: https://www.intrafocus.com/strategic-planning-overview/
Porter’s Five Forces
We looked earlier at PESTLE analysis, which focuses on the big strategic picture which affects a company. Five Forces, created by Harvard University professor, Michael Porter, looks instead at the business micro-environment. this means that it analyses the forces that are local to a business, and which impact on its ability to profitably deliver its service offer to customers (if profits are the objective, otherwise the over-riding objective for being in existence will be substituted for profits.)
As an analytical model, Five Forces helps business leaders to assess how the balance of power plays out within their market, as well as assessing the overall attractiveness and possible profitability of a particular industry or sector.
So what are the five forces?
- Buyers – who are increasingly discerning, demanding and often price-sensitive – whilst expecting maximum value from the products and services that they buy. Some industries will have extremely high price competition and low margins (such as FMCG businesses.) Others will operate in less competitive markets or have unique product offers, which allow for higher prices, less competition, greater customer loyalty, and higher margins. Satisfying customer needs is paramount for nearly all companies, however, regardless of their industry or whether they are profit or non-profit making. Within Porter’s Five Forces, the key thing to know is that buyers want maximum value for a minimum price.
- Suppliers – Suppliers want to deliver as little as possible for the maximum price. If they are powerful, suppliers will negotiate higher prices and/or favourable terms – especially if they hold a monopoly position.
- Substitutes – When customers can easily access a substitute product or service, the company’s position is weaker than if it offers a unique or more unusual (but in demand) product.
- New entrants – these can cause tension within a market, especially if they undercut rivals for the same service level. Existing companies may spend more on their marketing or another element of service delivery as a result.
- Existing rivals – All incumbent competitors must be assessed. Significant competition will invariably reduce profitability for everyone within the market, with prices being pushed downwards as a means to attract customers. Some industries operate with minimal competition (such as utility firms) and others are regulated which impacts the ability and speed to enter the market at all.
Applying Porter’s Five Forces
Whatever industry or organisation type uses this tool, the Five Forces will apply. When they are understood, they can be used to improve predictive decision making, to help assess the future position of the business and to create a successful strategy within a competitive market.
Businesses will look at each of the Five Force categories and ask a series of questions in relation to them. For example, when considering the most important factor of all – buyers (or customers) – they might ask:
– How many buyers exist in the market
– What their demographics are
– What their buying power is
– whether they have a propensity to switch
– Whether they can group together to increase buying power
– What their total purchasing value is, etc.
Presenting Porter’s Five Forces
Most businesses will find it easiest to present their Five Forces model as a diagram. The middle space will hold the Existing Competitive Rivals category, which denotes the critical position of this force, as well as the impact that each other force has upon it.
Taking the model forward
Porter’s Five Forces allows businesses to evaluate control levels between their own operation and the forces that influence it throughout its lifecycle – from suppliers who provide raw materials, to customers that buy, and to competitors and the threat of substitute products. As the business works through each section it will need to flag up any changes that are needed to maintain the balance of power – or to secure it where it currently tips elsewhere.
Note that sometimes information may be missing or difficult to procure when the five factors are being assessed. Sometimes businesses will need to make assumptions if research doesn’t reveal necessary answers. To avoid over-relying on assumptions, investigative routes such as customer surveying and industry whitepapers can be a good means of uncovering valuable insights that will feed into the analysis.
Find out more
The Intrafocus team is here to assist you with your strategic development, wherever your business is on its strategy journey. The first step is usually to hold a strategy workshop on your premises, facilitated by our highly experienced strategy professionals. We work with companies of all sizes, across all industries; profit, non-profit and third-sector. Please contact us to find out more.