Some of the world’s most successful businesses use Porter’s Five Forces to determine their strategy for the year ahead. Porter’s Five Forces is a model that can be applied to any segment of your business, or your entire business as a whole, to gauge the level of competition you’re facing within your industry, and maximise your long-term profits.
Named after Harvard Business School’s Michael E Porter, Porter’s Five Forces analyses five key forces that shape every industry in the world.
What are these forces and how can you analyse them for a boost in profits and success?
The Five Forces in Every Industry
Porter’s Five Forces are:
- Current competition in the industry
- The potential of new competition in the industry
- The power of suppliers
- The power of customers
- The threat of substitute or alternative products
The first point, rivalry among competitors in your industry, is sometimes seen as the “centre” which the entire model revolves around. This point covers your current competition – businesses that are providing similar products or services to yours. The more competitors you have, the more threats to your profits and market share.
However, the key things which can affect your business are around the edge – the other four forces in Porter’s model.
New businesses entering the market will add to point one, further undercutting your position in the industry. The easier the industry is to enter, and the fewer barriers there are to getting started in it, the more new competitors you’re likely to encounter.
How much power do buyers have in your industry? Do they have plenty of suppliers to choose from – can they afford to be picky? The more bargaining power your customers have, the less you have, not just on the subject of price but when it comes to brand loyalty too.
How about suppliers? How easily can suppliers drive up costs? How reliant is your business on the quality, speed and reliability of suppliers? How many suppliers are in your industry? As with customers, the more power suppliers have, the less your business has.
Finally, the threat of substitutes looms large over many businesses. If you produce products or services for which there are no close substitutes, you have a captive audience – but if your customers can turn to alternatives, you need to begin finding reasons why they shouldn’t.
The key to using Porter’s Five Forces is understanding them, then finding ways to beat, treat or alleviate any potential pitfalls or weaknesses you identify. Porter’s Five Forces is a doctor’s check up for your business – use it to check how you’re doing on a regularly yearly basis.
