Porter's Five Forces Analysis has been around for over 40 years. Until recently, however, only marketing studies, or even an MBA, allowed for in-depth familiarization with all current trends in sales and business planning. Today, this knowledge is available to anyone who wants to develop their company faster than competitors.
What is the analysis of Porter's five forces?
We often blog about different ways to evaluate the attractiveness of a business idea, such as the Osterwalder model or benchmarking. Everyone has to choose their own way of assessing the risk. The most ambitious ones use many different methods and are constantly looking for new ones. One theory worth knowing is Porter's five forces analysis.
5 porter forces
The analysis of Porter's five forces was first described only in 1979. It is quite difficult to imagine today, but before that, the evaluation of a business idea only started with a summary of resources and competition. It was only Michael Porter who proposed to evaluate the sector as a whole and ask yourself a rather important question whether it is worth being in it at all?
"The use of Porter's five forces in the world analysis is based on continuous scanning and monitoring of the environment, as well as gaining advantageous information on current and potential [rivals]. This is why many [companies] create plans based on scenarios that allow them to anticipate and respond to harmful changes in the environment. Strategic management assesses the environment as such, and in particular - the existing competition". This is what the authors of the work "The Application of Porter's Five Forces Model on Organization Performance", published in the European Business and Management Magazine, write. Porter himself noted that a healthy structure of the entire sector should be as important to corporate strategists as the appropriate position of the company.
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The analysis of Porter's five forces is based on the following steps:
1. Analysis of the intensity of competition.
2. Researching the potential for the future.
3. Analysis of possible substitutes for the offered goods or services.
4. Assessment of suppliers' potential.
5. Analysis of customers' purchasing potential.
These steps may seem quite obvious. Below is an elaboration of the activities that are undertaken within each of them and an example of the application of such analysis in practice.
The course of the analysis of Porter's five forces
The analysis of Porter's five forces begins with the selection and definition of a market and its situation. The level of rivalry and competition in the market is taken into account as well marketing strategy rivals. The "entry barrier" in a given industry is also analyzed here, because it is associated with the possibility of new products and services appearing on the market, as well as substitutes.
What sets this method apart from others is its emphasis on the opportunities and risks associated with suppliers. In the case of most products and services, it is impossible to disregard, at least to some extent, external supplies. Checking the vendor's capacity to produce and whether there are others in the event of problems can help avoid a bad business decision. A similar analysis should be performed in terms of customers - their purchasing power and tendency to transfer it to the competition.
Porter's five forces model and other methods
Porter's five forces model can be used together with other business risk assessment methods. One of them is the Osterwalder method. This one focuses more on resources within the enterprise, while Porter's five forces model also assesses external factors. It is mentioned alongside such methods as "resources and opportunities" (Wernerfelt, 1984), key competences of the organization (Pra-halad, Hamel, 1990), weak signals theory (Ansoff, 1975) or environmental dynamism (Bourgeois and Eisenhardt, 1988).
Porter's five forces analysis can be used instead of a business plan or as a good exercise to help you write it. It is one of the oldest of the above-mentioned methods. It is worth starting with this strategy marketing auditespecially before entering a new market or introducing a new product.
Porter's five forces analysis - an example
By applying Porter's five forces analysis to the largest companies, it can be clearly seen whether they use this method in their operation. The answer to this question is often yes. You can find such in-depth five-step analyzes on the web for companies like McDonald's or Apple. It shows that the fast-food giant is under constant pressure. And this is both from small, local restaurants and other large companies such as Burger King or Dunkin 'Donuts. Still, it remains afloat. Apple, on the other hand, spends enormous resources monitoring both competition and customer shopping habits. Importantly, in order not to lose the leadership position, it must continue to do so
By applying Porter's five forces analysis to the largest companies, it can be clearly seen whether they use this method in their operation. The answer to this question is often yes. You can find such in-depth five-step analyzes on the web for companies like McDonald's or Apple. It shows that the fast-food giant is under constant pressure. And this is both from small, local restaurants and other large companies such as Burger King or Dunkin 'Donuts. Still, it remains afloat. Apple, on the other hand, spends enormous resources monitoring both competition and customer shopping habits. Importantly, in order not to lose the leadership position, it must continue to do so.
This shows that the analysis Porter's forces at the very beginning of the business is not enough! The largest ones, even if they do not repeat it constantly, at least before each major move or regularly - e.g. every year. Otherwise, it would be very easy for them to disappear from the market in the face of unpredictable competition movements, the emergence of a substitute or problems with suppliers.