In 1979, economist Michael Porter published his Five Forces model in the Harvard Business Review. He later described it further in his 1980 book, "Competitive Strategy: Techniques for Analyzing Industries and Competitors.” His model, which is known as Porter’s Five Forces Framework, describes five external forces that can act upon a business.
How a business can respond to or is affected by these forces helps determine its competitive attractiveness. A business or industry is unattractive if these forces cause low profits. A company can use the Five Forces perspective to analyze the industry to which they belong and develop their corporate strategy around it. A company in an unattractive industry can still find ways to rise above the competition and increase profitability.
The forces that make up Porter’s framework include two from what is known as ‘vertical competition’: the bargaining power of customers and suppliers. There are three forces from ‘horizontal competition: the threat of new entrants, substitute products, and established rivals.
If an industry is easy and cheap to enter, the market can quickly become flooded. This would pose a serious threat to an already established company. To make an industry attractive, there should be significant obstacles in the way of new entrants so that each established company can continue to dominate a profitable share of the market.
Entry into an industry could be made difficult by natural factors, or the incumbent companies could engineer ways to block new entrants (such as through patents or mergers). Some of the elements of this force include government policies, financial requirements, barriers to entry, product differentiation, distribution access, brand loyalty, and the profitability of the industry. Understanding how these factors operate within your industry can shed light on how likely new entrants are to succeed at your expense.
A successful product substitution can be catastrophic for a company. If your entire product is no longer in demand, it doesn’t really matter how many competitors you have, or how efficient your processes are. You are offering something obsolete.
As a clarification, a substitution is something that uses completely different technology to fulfill the same need as your product. An example of this would be mobile phones versus landlines. Different companies offering landline phone service are competitors, but not substitutes for each other. However, a mobile phone is a substitute for a landline. The popularity of mobile phones is actively dismantling the landline industry, and there isn’t much that can be done about it.
Here are some of the factors of this force: costs of switching, product differentiation, ease of substituting, substitution availability, and customer loyalty. If you create a product that cannot be easily substituted (that is, there is no easy way to use different techniques to address the same need), then you are in a great competitive position. But if your product is less unique or effective, your position is much more tenuous.
Customer satisfaction is important for the success of any business. But the more power a customer has, the less power you have as a company. When customers are able to bargain successfully, you will see your profits decrease.
Customers tend to have the most power when there are many options for them to choose from. If you are the only company supplying a product that is greatly needed by a customer, they will likely need to pay what you charge.
Similarly, suppliers can exercise a significant amount of influence on a company’s profitability. If you are heavily impacted by the bargaining power of suppliers, you will not always be in control of your own profitability. You are ultimately a customer of that supplier, so you have more control over the cost of the material if there are many suppliers available to you.
Better yet, if you can be your own supplier you will not have to bargain at all. Sometimes this is not possible, or it would cost too much to implement. If so, you should be fully aware of how much control your suppliers have over your business and think of ways to mitigate that if it runs the risk of becoming costly.
How you hold up to your competition depends on a few different things: brand loyalty, cost, quality, and accessibility. You need to be able to market well, develop a good reputation, and make your products desirable and accessible.
The stronger your rivals are, and the more of them there are, the worse your position becomes. If, however, you have a patent on a particular product ensuring that no rivals can make a product that is quite as good as yours, you are likely less impacted by rivalry.
The Five Forces Framework is really quite simple in design. If you are interested in analyzing your existing business or perhaps the risk of entering into a new market, you can quickly and easily create a template for Porter’s Five Forces.
To start, you will demarcate space on a page for each of the Five Forces. Leave enough room to write out all of the different real ways that your business is impacted by each of these forces. You may want to begin with a large whiteboard. Develop a set of symbols to indicate whether different elements impact you positively, negatively, or neutrally.
Once you have your Porter’s Five Forces template created, you can begin to fill it in. For each force, spend some time brainstorming its relation to your business. Then write out the key factors for each force. Use your symbol library to give each factor an impact rating.
If you find that you are in a competitively attractive position, congratulations! You should still consider ways to maintain that position and try to anticipate things in the market that could alter that position.
If you discover that you are in a weak position and at risk of losing profitability, this is a great time to begin improving your corporate strategy. Assemble a team of stakeholders and try to identify ways that you can improve your competitive attractiveness. This will likely involve an analysis of business processes or the creation of new processes to help improve profits.
The Five Forces tool is a way to discover a company’s place in a competitive market. It can be incredibly enlightening and help investors make good decisions or prevent them from making risky ones. It can shine a light on a quickly worsening situation before a company becomes unsalvageable.
It can help guide a company’s strategy by providing an assessment of their environment, but it itself is not a tool for process improvement. If improvements or changes do need to be made, you will need to start working at a very detailed level, while keeping the Five Forces in mind.
You must also make sure to frequently monitor and assess the model to spot changes in an industry. Especially with the rapid growth of technology today, things can change quickly. Do not panic, however, with each change. Some are only temporary while others have a more lasting impact on an industry. To summarize, these are Porter’s Five Forces:
Process management includes a variety of aspects of a process. This could include the changing of a process or the optimization of a process. Improving a process will result in reduced waste in terms of time and money for a business. The right processes can help beat out the competition that is outlined in Porter’s Five Forces.
Below are ways that the right process management can beat out the competition of the five forces:
Identifying rivals can impact the way process management is handled. Companies with the most efficient processes can keep costs low while keeping product quality high. The ability to see how rivals work in regards to certain processes can be an example of what to do or what to avoid.
Porter’s Five Forces can impact the processes of a company as well as procedures. Identifying a rival in the market is imperative as it becomes far easier to measure successes and failures. Do not model the entire business after a competitor as a business needs aspects that stand out. Porter’s Five Forces impact processes and procedures in the following ways:
Updating processes and procedures with Porter’s Five Forces in mind can be quite useful. Understanding the different forces of competition impacting a business shouldn’t be undervalued.
FMEA is used by project managers in a variety of industries to identify potential pitfalls during a project. The goal of FMEA is to assess the risks and implement processes that will reduce/eliminate these risks. The modification of a current product is a great example as one part of production could potentially be a huge risk. Porter’s Five Forces identifies a few different risks that companies face in terms of competition.
The following are how FMEA and Porter’s Five Forces relate:
FMEA can allow a company to reduce risks and avoid disaster during important projects. Do not underestimate the impact this tool can have.