Poster’s five forces model of competition

“The five forces are environmental forces that impact on a company’s ability to compete in a given market. The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.”

Porter’s five forces is a framework for the industry analysis and business strategy development, developed by Michael E. Porter of Harvard Business School. It draws upon Industrial Organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. An “unattractive” industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching “pure competition”, in which available profits for all firms are driven down to zero.

Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally, requires a business unit to re-assess the market place given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models, have been able to make a return in excess of the industry average.

Aside from his innovative thinking, Porter has a special ability to represent complex concepts in relatively easily accessible formats, notably his Five Forces model, in which market factors can be analyzed so as to make a strategic assessment of the competitive position of a given supplier in a given market.

Porter’s Five Forces model can be used to good analytical effect alongside other models such as the SWOT (Strengths, Weaknesses, Opportunities, and Threats)and PEST (Political Factors, Economic Factors, Socio-cultural Factors, Technological Factors) analysis tools.

Porter’s Five Forces model provides suggested points under each main heading, by which you can develop a broad and sophisticated analysis of competitive position, as might be used when creating strategy, plans, or making investment decisions about a business or organization.

Porter’s Five Forces of Competitive Position

Competitive Rivalry, eg:

• number and size of firms
• industry size and trends
• fixed v variable cost bases
• product/service ranges
• differentiation, strategy

New Market Entrants, eg:

• entry ease/barriers
• geographical factors
• incumbents resistance
• new entrant strategy
• routes to market

Buyer Power, eg:

• buyer choice
• buyers size/number
• change cost/frequency
• product/service importance
• volumes, JIT scheduling

Supplier Power, eg:

• brand reputation
• geographical coverage
• product/service level quality
• relationships with customers
• bidding processes/capabilities

Product and Technology Development, eg:

• alternatives price/quality
• market distribution changes
• fashion and trends
• legislative effects