Digital Leadership & Soft Skills

⛓ Porter’s five forces model

Published by Pavel Nakonechnyy on (updated: ) in Business Analysis.
⛓ Porter’s five forces model

Much of the business analyst’s work is to assess the costs and benefits of delivering a project to the organization. To do that, business analyst has to know a fair bit of strategy analysis.  Strategy analysis covers a range of techniques that can be used to understand the business direction and the strengths and weaknesses of an organization, or part of an organization. Strategy will always incorporate some external analysis – ‘What’s happening out there?’, some internal analysis – ‘Where do we fit in to what’s happening out there?’, and some consideration of how new strategies could be implemented.

And today I’d like us to discuss an integral part of external environment analysis – Porter’s Five Forces. The Five Forces is a framework used to analyze the industry or business domain within which an organization operates. Analysis based on Porter’s Five Forces will help you to identify key competitiveness gaps and threats to suggest business appropriate response measures.

New entrants may want to move into the market if it looks attractive, and 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:

  • Economies of scale;
  • Product differentiation & branding;
  • Substantial capital investment by a new entrant;
  • Access to distribution channels;
  • Technologies and the use of patented processes.

Supplier power limits the opportunity for cost reductions when:

  • there is a concentration of suppliers, suppliers are larger than the customers;
  • high costs of switching suppliers;
  • the supplier brand is powerful;
  • customers are fragmented.

Customer power – or the ‘bargaining power of buyers’, as Porter called it – is high when:

  • concentration of buyers;
  • easy to find alternative sources of supply;
  • high cost of the product or service;
  • switching costs are low.

The threat from substitute products – for example, budget air travel instead of cross-channel ferries – is high when:

  • technological advancements produce more convenient products;
  • the need for the product is replaced by a different need;
  • we decide to ‘do without it’.

All of these forces impact on the competitive battleground in some way. On the battleground itself there is competitive rivalry. This is high when:

  • there are many competing firms;
  • buyers can easily switch from one firm to another;
  • the market is growing only slowly or not growing at all;
  • the industry has high fixed costs, and responding to price pressure is difficult;
  • products are not well differentiated, and so there is little brand loyalty; the costs of leaving the industry are high.

Porter’s framework is simple to use and understand, and it helps to identify the key competitive forces affecting a business. It is widely used in the development of strategies. There are, however, some weaknesses, of which the most often mentioned is that government is not treated as the sixth force. Porter’s response is that the role of government is played through each of the five forces – legislation affects entry and rivalry for example – and so it has not been ignored. There are also views that it is difficult to apply the model to not-for-profit organizations and that since the 1980s the increasing development of international businesses has led to a more complex set of competitive and collaborative relationships. Nonetheless, the framework is widely accepted as a useful analytical tool.