How does the five forces model of Porter help a company in strategic management?

Porter's Five Forces of Competitive Position Analysis were developed in 1979 by Michael E Porter of Harvard Business School as a simple framework for assessing and evaluating the competitive strength and position of a business organisation.

This theory is based on the concept that there are five forces that determine the competitive intensity and attractiveness of a market. Porter’s five forces help to identify where power lies in a business situation. This is useful both in understanding the strength of an organisation’s current competitive position, and the strength of a position that an organisation may look to move into.

Strategic analysts often use Porter’s five forces to understand whether new products or services are potentially profitable. By understanding where power lies, the theory can also be used to identify areas of strength, to improve weaknesses and to avoid mistakes.

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 benefits does Porter’s Five Forces analysis provide?

Five forces analysis helps organisations to understand the factors affecting profitability in a specific industry, and can help to inform decisions relating to: whether to enter a specific industry; whether to increase capacity in a specific industry; and developing competitive strategies.

• 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

In practice:Porter's Five Forces of Competitive Position Analysis

Analysis of the Indian business environment

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In the June 2010 issue of Financial Management magazine, the Five Forces model was applied to the emerging Indian business environment in comparison with more developed markets. The analysis found that factors such as state protectionism and a lack of infrastructure are greater barriers to entry in India than they are in more developed nations, where market forces are more powerful.

The analysis highlighted many issues affecting competition in emerging economies and compared them to those that are more prevalent in more developed markets.

One factor that could play a crucial role in India is public opinion, which exerts a considerable influence on the government. A good example of this is a campaign by local retailers against Walmart, who feel that the arrival of the US retail giant could put them out of business. Walmart has made huge investments in India, but is having to find ways around stringent regulations that prevent it from doing things as basic as putting its brand name on stores.

Right now, Porter's 5 Forces is the most useful tool for owners and managers to stay one step ahead of the competition in a challenging market. The Porter's 5 Forces model has always been popular with SMEs in particular, looking to invest for growth and manage risk to their limited resources.

Earmarked as the best marketing model to help small businesses analyze the competition in the marketplace, balancing these 5 forces is a must for your 2022 marketing action plan.

Porter’s 5 Forces is an analytical model that helps marketers and business managers look at the ‘balance of power’ in a market between different organizations on a global level, and to analyze the attractiveness and potential profitability of an industry sector.

• Competitive rivalry
• Threat of substitute products
• Bargaining power of buyers
• Threat of new entrants
• Bargaining power of suppliers

How do the 5 Forces work?

Competitive rivalry

The first aspect to analyze is the amount of competition your company faces. Think both on a macro and micro scale about the number of direct competitors you have in your industry and the products/services they offer in comparison to yours.

Markets with few competitors are attractive but can be short-lived. On the other hand, highly-competitive markets with many companies chasing the same work reduce your power and can push you to lower your prices and innovate new products.

Things to consider in a recession:

• What’s the level of competition in your company’s sector?
• Who are your large, direct competitors? What advantages do they leverage over you?
• Who are your smaller, independent competitors? What do they do to stay competitive?

Not sure where to start? Our 'competitor benchmarking with RACE' training module and actionable template for Business Starter Members will help you identify rivals and opportunities through a customer-centric model. Find out more.

Competitor benchmarking with RACE​

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Threat of substitute products

This refers to the possibility that customers will find a different (read: quicker and easier) way of doing what your company does. You may have originally conceived products or services that help customers, but as technology changes over time, so do the desires and problems of customers.

Always examine how your customer’s lives have changed as your company has grown. For example, you may sell a piece of software that automates a process or synchronizes activity into one platform. As user behaviour changes, you can find opportunities to update your product, or even grow a new service offering.

Things to consider in a recession:

• How easy is it to find an alternative to your products or services?
• What aspects of your products/services can your customers do manually?
• How do cheaper substitutes measure up against your company for ROI?

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