Which of Porters five forces is the strongest?
Porter’s Five Forces is one of the most traditional, well-known, and most widely used strategic macro analysis models. Show
Used in conjunction with a PESTLE analysis, it helps you understand the competitive forces at work in an industry and how they affect the profitability of your business. The term was first introduced by Michael E. Porter in his classic 1979 Harvard Business Review article. In it, Porter outlines his model and demonstrates how it helps businesses assess an industry’s competition and gain strategic insight into competing more effectively. Now, the goal of this article is to give you:
By the time you’ve finished reading, I’m confident you’ll better understand your industry structure and be able to spot and exploit new strategic opportunities. Table of Content
Who Is Michael E. Porter?First of all, let’s start with the man himself. Born May 23, 1947, in Ann Arbor, Michigan, Michael Porter is a leading economist and professor at Harvard Business School. He is the author of more than 18 books over 125 articles on corporate and competitive business strategy. His models and theories received numerous awards leading to recognition as one of the most influential economists in history. His fame and recognition came off the back of developing the Five Forces Framework that bears his name. Along with the Five Forces Framework, his Value Chain, Diamond, and Four Corners Analysis models completely changed macro-business analysis around the world. What Are Porter’s Five Forces?Porter’s Five Forces (listed in no particular order) that affect an industry’s profitability are:
Porter’s Five Forces Model FrameworkAt its core, Porter’s Five Forces was created to help us evaluate the profitability of an industry. This is, after all, why the majority of businesses exist. As I briefly highlighted above, the Five Forces are: ● The threat of existing substitute products. Once you understand them you can make better predictions, refine your strategy, and ultimately become more profitable.
Now, to effectively use Porter’s Five Forces to analyze your industry you’ll have to look at each threat individually. New EntrantsThe first of Porter’s Five Forces we’re going to analyze is new entrants or the possibility (and likelihood) of companies entering an industry and boosting the competition. This likelihood is typically determined by what’s known as the barriers to entry. If they are low, and it takes little effort, time, money (or reduced legislation), then the threat of competitor’s flooding in is extremely high. Some examples of industries with higher barriers to entry are telecommunications (network infrastructure), pharma manufacturing (patents), and airline travel (fleet purchase and maintenance). Conversely, if barriers to entry are high (expensive, strict legislation, lengthy qualification process, etc.), then it’s going to put a lot of companies off and decrease the competition. Some examples of industries with low barriers to entry are landscaping, home and office maintenance, and online advertising. The typical determinants of threat as listed by Porter are:
SubstitutesA substitute product can be anything that performs or carries out a similar function to your products or services. Email is a substitute for written mail, Slack is a substitute for email, and Microsoft Teams and Google Chat are substitutes for Slack… Many businesses tend to struggle with this section of the framework as they focus solely on direct competitors. But if you think about it, substitutes appear in many different shapes, sizes, and offerings and may differ vastly from your product. For example, Blockbuster famously failed to recognize the emergence of Netflix as a substitute product. It was an online streaming service, with no physical stores nor DVD and VHS stock. So how could they be genuinely classed as a competitor? Well, the rest, they say, is history… Source: DriftThis is an extreme case of what can happen if substitutes are left ignored, but in general, they pose a threat to an industry’s profit potential as they tend to set a “price ceiling” or limit on what can be charged. If an industry (as a whole) fails to acknowledge and/or adapt to substitutes through product performance, marketing, R&D, etc. it will suffer. Buyer PowerThe next two factors we are going to look at are essentially the inverse of one another. The Bargaining Power of the Buyer vs. The Bargaining Power of the Supplier. Starting with the former, we are essentially talking about the buyer’s ability to drive and manipulate the industry. The more power they have, the easier it is for them to carve out value for themselves by driving down prices, demanding better quality products (consequently increasing supplier’s costs), and often playing industry competitors against one another. Of course, all this comes at the expense of industry profitability. This scenario can emerge when buyers have leverage over industry participants, especially if they are price-sensitive, using their advantageous position to force a reduction in prices. The typical determinants of buyer power threat are:
Supplier PowerWhat happens, then, when the shoe’s on the other foot? With suppliers in the driving seat, you’ll often see a threat of increased prices for goods and services, reduced product quality, or a shift of costs to other industry partners. A good example is the software industry. Take the likes of Microsoft, Apple, and Salesforce. They practically monopolize their respective markets, leaving little leverage room for buyers. We can tell when suppliers have the upper hand by spotting some of the typical determinants of supplier power threat:
Competitive RivalryThe final and arguably most important factor is competitive rivalry. Competitive rivalry is a familiar concept to many business owners and entrepreneurs, manifested through heavy discounting, innovative product introductions, marketing campaigns, and service improvements. As might be expected, high levels of rivalry severely affect the profitability of an industry. Typically, when one business makes a significant market move it forces competitors to counter with their own. This endless cycle of action and reaction is what limits profitability. It can particularly harmful (for businesses) if the moving factor is the price… The typical determinants of threats of competitive rivalry are:
Porter’s Five Forces TemplateWhile you might understand the theory and logic behind Porter’s Five Forces Framework, but it’s true that the practical application can be very challenging. This is one of the reasons we brought business strategist Aaron Montgomery on board to teach a dedicated module of Porter’s Five Forces in our online business program: Aaron Montgomery teaching ThePowerMBA students Porter’s Five ForcesSpeaking of transforming logic into practice, there’s another fantastic resource in Dr. Michael E. Dobbs’ research paper Guidelines for Applying Porter’s Five Forces Framework. Not only does he coherently lay out the biggest challenges in the practical implementation of the Five Forces, but more importantly, he includes a handy set of templates. This is extremely useful in teaching business owners how to turn their analysis into strategic action. Dr. Dobbs’ templates help you to identify where the key opportunities are in your industry. What are the principal threats you are dealing with? Where are they coming from? And how should you deal with them? They’re also incredibly easy to use, as I’ll quickly run through now. How to Use Dr. Dobbs’ Five Forces TemplateI’ve grabbed an example competitive rivalry template to give you a better understanding of how it works. Now I know it’s fairly self-explanatory, but I’ll walk you through it nonetheless. As you can see, the specific force to be analyzed is listed at the top of the template. Underneath, you’ll see there are eight sources of threataffecting the profitability and structure of your industry. Dobbs notes that these have been selected after carefully combing through a collection of Porter’s published works. Each of these sources is accompanied by a threat level indicator bar scored from low, to high. The farther right you score that source, the higher the perceived level of threat is. The space below the source is to be filled with notes detailing the reason behind the given scores. Finally, space is provided for you to indicate key opportunities and threats you feel are facing the organization as a result of your analysis. As mentioned earlier, you must directly link analysis to strategic action. This turns Porter’s Five Forces from “academic framework” into “actionable analysis”. New EntrantsSupplier PowerBuyer PowerSubstitutesCompetitive RivalryCompetitive Strategy Book (Michael Porter)If you’re looking to seriously implement porter’s five forces as part of your macro business analysis then I highly recommend you grab yourself a copy of Competitive Strategy. Porter runs through hundreds of examples of his Five Forces Framework analysis in a wide range of industries. Also, towards the end of the book, Porter demonstrates which strategic actions should be taken when faced with specific threat sources – extremely helpful for first-time analysts. Combine that with Dr. Dobbs’ research and our list of other must-read books for entrepreneurs and you’ll have a nice collection to add to your bookshelves. Learn Porter’s Five ForcesIf you are serious about your business and want an instructor who can comprehensively break down and explain the Five Forces framework, then it might be worth taking a quick look at ThePowerMBA. As mentioned previously, an entire module of our online business program is dedicated to the subject. It’s designed to help you draw actionable insight from your analysis and discover how you can compete more effectively within your industry. So, go check it out. 😉 Also, if you do have some success with the templates, let us know in the comments below! It’d be great to get your feedback. Which of Porter's five forces is generally the strongest industry force and is influenced by all other forces?Lesson Summary. Porter's Five Forces is a framework based on the competitive forces that influence an industry the most, and it helps us determine whether we can be successful in an industry. These forces are: Competitive rivalry, which is the strongest influence on whether entering an industry would be profitable.
What are the strengths of Porter's five forces?Advantages (Pros / Benefits) of Porter's Five Forces. 1) Helps to Estimate the Competition in the Industry. ... . 2) Showcase where the Strengths and Threats Exist. ... . 3) Identify which Entities Holding the Power. ... . 4) Display Opportunities to Expand the Business. ... . 5) Assist to Understand the Corporate Risk.. Why is Porters 5 Forces important?Porter's Five Forces Model is an important tool for understanding the main competitive forces at work in an industry. This can help you to assess the attractiveness of an industry, and pinpoint areas where you can adjust your strategy to improve profitability.
What is the power of buyers?What is Buyer Power? Buyers have the power to influence price and the quantity of products sold. Powerful buyers can bargain on volume or switching costs or they can find substitute products. Price sensitivity also impacts the buyer/seller relationship.
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