Porter’s 5 Forces Explained and How to Use the Model

Porter’s Five Forces is a strategic management model that provides a framework for analyzing an industry and determining its attractiveness. Developed by Harvard Business School professor Michael Porter in 1979, the model has become a widely used tool for business strategy analysis. In this article, we will explain Porter’s Five Forces model and provide guidance on how to use it to gain strategic insights.

What is Porter’s Five Forces Model?

Porter’s Five Forces Model is a tool used to analyze an industry’s structure and competitiveness. It is based on the premise that there are five key forces that shape an industry’s competitive environment. These forces include:

1. Threat of New Entrants: The degree to which new companies can enter the industry and compete with existing players.
2. Bargaining Power of Suppliers: The ability of suppliers to increase their prices or reduce the quality of their products, which can negatively impact the profitability of companies in the industry.
3. Bargaining Power of Buyers: The ability of buyers to negotiate lower prices or higher quality products from industry players, which can also negatively impact the profitability of companies in the industry.
4. Threat of Substitute Products or Services: The degree to which customers can substitute products or services in the industry, which can negatively impact the profitability of companies in the industry.
5. Intensity of Competitive Rivalry: The degree of competition between companies in the industry, which can impact pricing, marketing, and overall profitability.

How to Use Porter’s Five Forces Model

1. Identify the Industry: The first step in using Porter’s Five Forces model is to identify the industry that you want to analyze.
2. Identify the Key Players: The next step is to identify the key players in the industry, including suppliers, buyers, competitors, and potential new entrants.
3. Analyze Each Force: The next step is to analyze each of the five forces in the industry and assess their impact on the industry’s competitiveness. Consider factors such as the number of suppliers, the availability of substitute products, and the intensity of competition.
4. Determine the Industry’s Attractiveness: Based on the analysis of the five forces, determine the industry’s overall attractiveness. A highly attractive industry will have low threats of new entrants and substitutes, low bargaining power of suppliers and buyers, and low intensity of competitive rivalry.
5. Develop a Strategy: Based on the analysis of the industry’s competitiveness, develop a strategy that takes advantage of the industry’s strengths and addresses its weaknesses. For example, if the industry has high levels of competitive rivalry, a company may focus on differentiating its products or services to stand out from the competition.

Examples of Porter’s Five Forces Model in Action

1. The Automobile Industry: In the automobile industry, the threat of new entrants is low due to high capital requirements for manufacturing and distribution. The bargaining power of suppliers is moderate due to the availability of raw materials, but the bargaining power of buyers is high due to the abundance of choices and the ability to compare prices. The threat of substitute products is low, but the intensity of competitive rivalry is high due to the large number of companies in the industry.
2. The Airline Industry: In the airline industry, the threat of new entrants is high due to low barriers to entry, but the bargaining power of suppliers is low due to the large number of suppliers. The bargaining power of buyers is high due to the abundance of choices and the ability to compare prices, but the threat of substitute products is low. The intensity of competitive rivalry is high due to the large number of companies in the industry.
3. The Grocery Industry: In the grocery industry, the threat of new entrants is low due to high capital requirements for building and maintaining stores, but the bargaining power of suppliers is high due to the limited number of suppliers. The bargaining power of buyers is high due to the abundance of choices and the ability to compare prices, but the threat of substitute products is moderate due to the availability of alternative grocery stores and online shopping. The intensity of competitive rivalry is high due to the large number of companies in the industry.
4. The Technology Industry: In the technology industry, the threat of new entrants is high due to low barriers to entry, but the bargaining power of suppliers is low due to the large number of suppliers. The bargaining power of buyers is moderate due to the availability of alternative technologies and the ability to compare prices. The threat of substitute products is high due to the rapid pace of technological innovation, but the intensity of competitive rivalry is moderate due to the dominance of a few major players in the industry.

Conclusion

Porter’s Five Forces model provides a useful framework for analyzing the competitiveness of an industry and identifying opportunities for strategic advantage. By assessing the impact of each of the five forces, businesses can gain valuable insights into the strengths and weaknesses of their industry and develop a strategy that takes advantage of its strengths and addresses its weaknesses. While the model has its limitations, it remains a widely used tool for business strategy analysis and can help businesses make more informed decisions about their future direction.