1. Porter’s Five Competitive Forces
The four key components of Strategy Analysis are principles, practices, techniques, and skills. They play an essential role in identifying and validating the organization’s strategic needs, defining suitable solution approach(es) and solution(s), and planning, monitoring, and engaging stakeholders to achieve the organization’s strategic objectives. Techniques describe a step-by-step approach to conducting Strategic Analysis activities. More about cbap training course check out here.
Need to assess the competitive advantage of a particular organization? Here is a Strategy Analysis technique to achieve that. This blog will look at a technique called Porter’s Five Competitive Forces with examples.
History of Porter’s Five Competitive Forces as a strategy analysis technique
The Porter’s Five Competitive Forces strategy analysis technique was first introduced by Michael Porter, a prominent Harvard Business School professor, in his 1979 book “Competitive Strategy.” He developed the Five Forces Model to help business executives understand the competitive dynamics of their industry and devise strategies to counter the threats posed by their rivals. He believed that the success of any company was dependent on the level of competition in the industry. The five forces that Porter identified were: Threat of New Entrants, the Threat of Substitutes, the Bargaining Power of Buyers, the Bargaining Power of Suppliers, and Rivalry Among Existing Firms.
Since its initial publication, the Five Forces Model has become a popular tool for industry analysis and strategic decision-making. It has been used to analyze a wide range of industries, from retail to technology, and is frequently referenced in business literature. The idea of the Five Forces Model has been further developed by academics and business practitioners, resulting in a range of different frameworks and models. For example, the Resource-Based View of the firm has been used to analyze the competitive environment of an industry, while the Value Chain Model has been used to assess the competitive advantage of a particular organization.
Today, Porter’s Five Competitive Forces is widely used by business executives and strategy consultants to assess the competitive environment of an industry, identify opportunities and threats, and develop effective strategies to gain a competitive edge. It is also used extensively in the fields of economics, management, and business strategy.
Advantages of Porter’s Five Competitive Forces as a strategy analysis technique
1. Comprehensive: The five forces model allows a comprehensive analysis of the competitive environment in which the firm operates. This is important as it allows companies to understand the forces that can affect their business and how to gain a competitive advantage in their industry.
2. Easy to Understand: Porter’s five forces model is easy to understand, even for non-strategy professionals. This allows companies to quickly and easily apply the model to gain insights into their competitive environment.
3. Incorporates Multiple Perspectives: The five forces model incorporates multiple perspectives, both internal and external, when considering a company’s competitive environment. This is important as it allows companies to consider their competitive environment from all angles, thus gaining a more comprehensive understanding.
4. Facilitates Strategic Decision Making: By allowing companies to quickly and easily analyze their competitive environment, the five forces model facilitates strategic decision-making. Companies can use the model to identify potential opportunities and threats in their industry and then adjust their strategy accordingly.
5. Universally Applicable: The five forces model can be applied to any industry, regardless of the product or service. This makes it a powerful tool for companies in any industry, as they can quickly and easily analyze their competitive environment and make strategic decisions.
Weaknesses of Porter’s Five Competitive Forces as a strategy analysis technique
1. Limited Perspective: Porter’s Five Competitive Forces framework is limited to the traditional market structure of a single industry and does not account for other factors like global competition, technology, or government regulation.
2. Time Constraints: The framework requires a significant time commitment to analyze and understand the market, as well as to monitor changes over time.
3. Complexity: The framework can be complex to understand and apply, especially for those who are not familiar with the underlying economics and business dynamics.
4. Limited Use: The framework is limited to analyzing competition within an industry and does not work well when analyzing other types of markets, such as those that involve multiple industries, products, or services.
5. Inaccurate Assumptions: The framework is based on certain assumptions that may not hold true in certain markets. For example, the threat of substitute products may be vastly different in markets where technology is rapidly evolving.
Relationship of Porter’s Five Competitive Forces with other strategy analysis techniques
Porter’s Five Competitive Forces is often used in conjunction with other strategy analysis techniques such as SWOT Analysis, PEST Analysis, and Value Chain Analysis. SWOT Analysis looks at the strengths, opportunities, weaknesses, and threats of a business and is often used to identify potential opportunities to gain a competitive advantage. PEST Analysis looks at the political, economic, social, and technological factors that can impact a business. Value Chain Analysis looks at the activities that a business carries out to add value to its products or services and identifies any areas of improvement. All of these techniques can be used together to develop a comprehensive strategy and to identify potential areas of competitive advantage. Porter’s Five Competitive Forces can be used to identify the key competition in the industry and how they are affecting the business. This can be used in conjunction with the other analysis techniques to determine which strategies will be most effective for the business to gain a competitive advantage.
Future of Porter’s Five Competitive Forces as a strategy analysis technique
The future of Porter’s Five Competitive Forces as a strategy analysis technique is promising. It is a well-accepted and widely used tool for analyzing the competitive landscape of any industry. It is a valuable tool for strategists to gain insights into the competition and to better understand the dynamics of the industry. As technology and the global economy continue to evolve, the five competitive forces will continue to be useful tools in helping strategists to identify and monitor changing market conditions. Additionally, the changing competitive landscape may require strategists to develop new strategies to succeed in their industry, and the five competitive forces will be a useful tool to help strategists make well-informed decisions.
A simple yet powerful tool to identify the main sources of competition in your industry or sector.
In his book Competitive Advantage (1985), Professor Michael Porter identified ‘5 competitive forces that determine industry profitability’. These are
1.Competition in the industry
Prof. Porter says these competitive forces are critical because they influence the prices, costs, and required investment of firms in a given industry. Companies can gain a competitive edge if they can cope with these 5 forces better than their rivals. He adds that companies can adopt one of three competitive strategies:
2.Cost leadership – being a low-cost leader
3.Differentiation – uniqueness
4.Focus – niche market-driven.
New entrants may want to move into the market if the barriers to entry are low. Globalization and deregulation both give new entrants this opportunity, but there are barriers to entry that organizations build. These include:
1.Economies of scale: if a substantial investment is necessary before a new entrant can compete, then this may be a deterrent.
2.Product differentiation: if existing products and services are seen to have strong identities that are supported by high expenditure or branding, then new entrants may be deterred from entry.
3.Access to distribution channels: existing distribution channels may be committed to existing suppliers, thus requiring new entrants to find new and different distribution channels.
4.Technologies and the use of patented processes.
Supplier power limits the opportunity for cost reductions when:
●There is a concentration of suppliers and supplying businesses are bigger than the many customers they supply;
●The costs of switching from one supplier to another are high because of supply contracts, interlinking systems with suppliers, supply logistics, or the inability of other suppliers to deliver;
●The supplier brand is powerful, e.g., The power of ‘Intel Inside’; customers are fragmented.
Customer power – or the ‘bargaining power of buyers, as Porter called it – is high when:
●There is a small concentration of buyers and many small organizations in the supplying industry, for example, in the supply of food to supermarkets;
●Alternative sources of supply are available and easy to find;
●The cost of the product or service is high, encouraging the buyer to search out alternatives;
●Switching costs are low.
The threat from substitute products – for example, budget air travel instead of cross-channel ferries – is high when:
●Product substitution from new technologies is more convenient – DVDs for videos, for example;
●The need for the product is replaced by a different need; we decide to ‘do without it.’
●Another example that affects us all is the impact of high-speed trains on airlines – particularly between London, Paris and, Brussels.
By getting your 5 forces into balance, you can focus on generating value on the terms that are right for you.