Porter's Five Forces
Porter's Five Forces is a strategic analysis tool developed by Harvard professor Michael Porter, designed to assess the competitive dynamics of a market. Introduced in his 1979 article, "How Competitive Forces Shape Strategy," the model identifies five key forces affecting a firm's competitive environment: the threat of new entrants, the threat of substitute products or services, the bargaining power of suppliers, the bargaining power of customers, and the intensity of industry rivalry. This framework helps businesses evaluate their strategic positioning and anticipate market changes, enabling informed decision-making.
The analysis considers both vertical forces (supplier and customer power) and horizontal forces (threats from new competitors and substitutes), and it is particularly useful for firms operating in a single industry. However, when businesses operate across multiple sectors, separate analyses are necessary for each line of business. Additionally, the model has been expanded to include a sixth force, complementors, which refers to businesses that enhance the value of a company's offerings. While Porter's Five Forces is widely utilized in strategic planning, it has faced criticism for its assumptions about competition and the unpredictability of market conditions, highlighting the complexity of real-world business environments.
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Porter's Five Forces
The five forces analysis tool was developed by Harvard professor Michael Porter. The tool is commonly applied in the development of business strategy and is used as a method for understanding interfirm competition in various sectors. Porter was dissatisfied at other strategic analysis tools such as SWOT and PEST analyses and so developed the field of strategic theory by introducing this tool. The tool explains how three external and two internal forces combine to shape the intensity of competition, and hence attractiveness of any given market. It tends to be used in application, as a preliminary qualitative assessment of the firm’s strategic positioning with a view to using more developed tools at later stages of analyses.
Overview
Michael Porter’s five forces tool traces its roots back to his first article published in 1979 in Harvard Business Review, “How Competitive Forces Shape Strategy.” He established that the following five forces were important to consider when considering the position of a firm and its products and services in the marketplace: (1) threat of new entrants; (2) threat of substitute products/services; (3) bargaining power of suppliers; (4) bargaining power of customers; (5) the industry. These forces are commonly depicted in a diagram with forces one through four pointing into force five.
The five forces can further be considered in terms of vertical forces, i.e., the bargaining power of suppliers and customers, and horizontal forces, i.e., the threat of new entrants, substitute products, and industry rivals jockeying for position. Significantly, in addition to considering the strategic positioning relative to one’s present industry competitors, the model looks to future products and services, and new providers of products and services that may enter the industry and compete with existing offerings.
Some companies engage in more than one industry or marketplace. The five forces analysis is only appropriate for the analysis of an individual line of business, so when a business is engaged in multiple ventures in different industries, a five forces analysis should be done for each. A significant change to any of the five forces should serve as an opportunity to pause and consider the business’s strategy within that marketplace.
Adam Brandenburger and Barry Nalebuff made an important contribution to the model by adding what has commonly been deemed the sixth force, that of complementors. A complementor is a business that complements the product or service of another business and adds value to their mutual customers. An example would be a company that produces apps that come preloaded on another company’s cell phone.
The five forces model has been criticized by some academics. For example, Kevin Coyne and Somu Subramaniam asserted that the model assumes that there is no relationship or collusion between those companies that may be competing with the firm, supplying the firm, or buying from the firm. Furthermore, they contend that marketplaces are uncertain places, and there is not always the opportunity to plan strategically and respond to the strategic advances of others.
Bibliography
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