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Porter’s five forces

Porter’s five forces

PortersFiveForces

Michael Porter is one of the world’s most renowned authorities on competitive strategy. His five forces model captures the intensity and complexity of competition within an industry in five underlying forces. It was developed as a reaction to SWOT analysis which Porter considered to lack rigour. Porter’s five forces is one the key situation analysis tools used in strategic planning.

Industries are made up of companies that produce similar products and services. Some industries are more profitable than others but why should this be the case? The answer according to Porter comes from understanding the nature of competition across different industries.

The nature of competition within an industry is defined by five basic competitive forces:

  1. Intensity of competition amongst industry incumbents
  2. Bargaining power of buyers (i.e. customers)
  3. Bargaining power of suppliers
  4. Threat of substitute products and services
  5. Threat of new entrants

It is the combined strength of Porter’s five forces that determine the long term attractiveness and value creation potential of an industry. Different industries will have different potentials depending on whether the nature of competition is benign or cut throat.

Strategic planning is fundamentally about trying to find a position in the market where a company can build a position of sustainable competitive advantage and thereby defend itself against the five competitive forces.

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