Porter’s Five Forces is a framework for assessing the attractiveness of a market. Companies use this framework to analyze how profitable they could be, based on buyer and competitor behavior. It helps new companies gauge their likelihood of success before launching and also helps existing companies figure out how to expand into new territory.
About the Porter’s Five Forces Framework
This framework was developed by Harvard Business School professor, Michael E. Porter, and was first published in the Harvard Business Review in 1979. Porter suggests that businesses should analyze their position along five parameters:
- Rivalry with the Competition: how many competitors exist currently? How does their pricing compare to yours? How similar is their product or feature set? Do they have a competitive advantage you lack?
- New entrants: How easy is it for new competitors to enter the market? What are the barriers to entry? According to Porter, forces that can enable or deter new competition include economies of scale, product differentiation, capital (financial) requirements, cost advantages (such as patents), access to distribution channels, and government policies or regulation.
- Suppliers: If you sell a physical product (or rely on others to support your business), how much bargaining power do your suppliers possess? “Suppliers” might even include your employees or the partners that act as distribution channels.
- Power of customers: How much bargaining power do your customers have? Are customers reliant on your product, or could they stop using it? How sensitive are they to pricing changes?
- Substitutes: are there other products that people could use instead of yours? How similar are they? Is it difficult to switch from one product to another, and are there switching costs? Do your customers feel a sense of loyalty to your brand?
How to Use Porter’s Five Forces to Build a Winning Strategy
Spend time with your team fleshing out the five forces. Discuss each one in detail, so that all relevant team members have a nuanced understanding of your position. You’ll likely find that different members of your team can contribute perspectives that others lack. This exercise will help you gain stronger collective intelligence and achieve greater team alignment.
Using Porter’s Five Forces approach can clarify the strengths and weaknesses of a team’s position. Consequently, the team can more easily avoid risks and double down on their advantages. For instance, if partners and resellers are a key source of new revenue, you may decide to shore up this advantage by asking for exclusivity. Conversely, if you discover a weakness around substitutes, you might consider introducing hurdles to switching.
Once you’ve aligned on where you stand with regard to these five forces, document them and share them in a central knowledge management system. In doing this, your team can devise a more strategic path forward. You may also find it helpful to revisit them in the future to see where you’ve gained or lost ground.