Porter's Five Forces Analysis

What is Porter’s Five Forces model?

In 1980, Michael Porter published his book Competitive Strategy, which described the five forces that shape the structure of all industries, and that establish the rules of competition and the reasons for profitability and success within a certain industry. This became known as Porters Five Forces, a tool which aids organisations in analysing the attractiveness of a certain industry, and their likelihood of profitability and success within that industry (Dobbs, 2012). Since its inception, it has become one of the most well-known and popularly used business analysis tools, due to its comprehensive insight into the current business environment. Porter identified these forces as he recognised that organisations predominantly keep a close eye on their competitors, rather than external forces, and it was these external forces that play a significant role in a business’s profitability and success. These five forces make up the competitive business environment and pose a risk to a business’s profitability and success, which are: competitive rivalry, supplier power, buyer power, threat of substitution and threat of new entry (Porter, 1980).

Competitive rivalry looks at the quantity and quality of competitors within your market. Markets that have a lower level of rivalry are more secure market for the business, as it allows for more control over their prices due to less competition. However, even with intense rivalry, businesses can circumvent this and attract and retain customers with price cuts and high-impact and targeted marking campaigns. Supplier power is determined by how easy it is for your suppliers to change their prices. If there are multiplier suppliers, this gives you more leverage to go with the best price or quality in the market, however, if the product or service they offer is unique, this means the stronger their position and the easier for them to increase their price, which can impact your profit. Buyer power looks at how easy it is for consumers to influence your pricing strategy, which explores the quantity of buyers you have and the size of their orders, and the cost on the buyers to switch their orders to a rival. If these costs are low, this dictates the buyers strength as they are better positioned to dictate their terms to you. However, if you have a large number of buyers, this weakens buyer power as they are considered easily replaceable.

Threat of substitution refers to the customers ability and likelihood of finding a different way of doing what you do – a substitution that is easy or more affordable weakens your position on the market and threatens your profit margins. Threat of new entry refers to how easy it for a new business to enter your market, including how costly it would be to enter your market, how many competitors there are and how regulated the sector is. If it is low cost and effort to enter the market and compete, or if your technologies and ideas are not legally protected, this means that rivals can quickly enter the market and compete with you, weakening your position. However, if the market has high barriers to entry, you can maintain a strong position and take advantage of this in terms of pricing.

When and why should you use Porter’s Five Forces analysis?

Porters Five Forces analysis is used to analyse the balance of power within a certain industry or market, in order to redefine their strategy, reorganise the business or diversify into new markets. It is used throughout all stages of the organisations lifecycle, as the balance of power is constantly shifting with new entrants into the market, growing or shrinking supply of suppliers. It is also used by different divisions of the business, such as logistics or marketing to dictate the individual strategies these divisions need to implement.

What are the benefits of using Porter’s Five Forces analysis?

The main of utilizing the Porters Five Forces model is that it provides the groundwork for a strategic action plan for the organisation. Porters Five Forces outline the critical strengths and weaknesses of the organisation, define their positionality within their industry, shed light on areas in which strategic redirection will yield greater profitability, and aid in forecasting the parts where industry trends will hold the greatest influence as either opportunities or threats. Understanding Porters Five Forces and the impact of these on the businesses success will overall aid the business in redefining its strategy, analysis its current strengths and weakness, and aiding in the consideration of areas and sectors for diversification.

Strengths and weaknesses of Porter’s Five Forces analysis?

Porter’s (1980) Five Forces go beyond conventional market and competitor research, by allowing the organisation to explore specific elements of the market in which they operate or are seeking to diversify into in greater detail, enabling the organisation to make more informed and strategic business decisions. Through understanding the opportunities and threats within a certain sector, this can help in identifying the individual businesses strengths and weaknesses and enable the organisation to strategically plan to either take advantage of their strengths or improve upon these weaknesses. However, Porter’s (1980) Five Forces have been criticised by many other academics and business strategists, such as Coyne and Subramaniam’s (1996) assertion of three ‘dubious’ assumptions that underly the five forces, weakening the model, which are: the disconnect between buyers, competitors and suppliers, value is structural advantage and that uncertainty is low. The assumption that buyers, competitors and suppliers are disconnected from each suggests that they do not interact or collude together, which has been repeatedly proven to be incorrect. The assertion that the source of individual value is a firm’s structural advantage, meaning that the creation of barriers to entry leads to business success is heavily contested. By suggesting that uncertainty is low, this implies that participants are able to plan for and respond to changes in a firm’s competitive behaviour, however, uncertainty is not always low, particularly in times of economic decline. The model places extensive weight on the macro-economic environment without considering specific internal aspects of the business, and fails to provide solutions to alleviate high or low force threats.

What fields of study can benefit from the use of a Porter’s Five Forces analysis?

Porter’s Five Forces model is typically used within the remit of organisational studies, as well as marketing, entrepreneurship, business strategy and economics. These benefits from the use of the Five Forces analysis by its ability to analyse the organisations business environment, and further understand the macroeconomic factors at play which influence a business’s successes or failures. It provides an insight into an organisations strategic decision making process, and can be particularly useful within the field of marketing, to provide an organisation with an insight into the macroeconomic environment so they understand how to successfully tailor their marketing strategy in a way that reflects their buyers and suppliers power.

How do you apply Porter’s Five Forces analysis?

The Porters Five Forces model allows you to assess the amount of control your organisation has with the influential forces throughout the production process, which means that it must be followed in a somewhat orderly fashion – first reviewing the supplier power, before looking into the threats within the market, before considering the bargaining power of buyers. This allows you to review the process in a linear fashion and enables you to make the changes from the earliest points that are necessary to shift the balance of power towards your organisation. This information isn’t always readily available, so at some points, educated assumptions and guesses need to be made, as well as the use of industry white papers and market research through surveying customers or paying external organisations to conduct industry specific research for the customers.

Porter’s Five Forces Template

Porters 5 Forces

Figure 1: Graphical Depiction of Porters Five Forces (Porter, 1980)

Porter’s Five Forces Analysis Example of Netflix

 1. Supplier Power

• Whilst the Netflix industry consists of only a few suppliers, the power of these suppliers is high.

• A prime example of this is Netflix’s deal with Warner Bros.

o Netflix must delay the streaming of a newly released film for 28 days, leading to impatient customers buying from stores rather than awaiting streaming options.

• As supplier content is a large part of the supplier’s revenue, suppliers are reluctant to allow any streaming company immediate streaming rights. 

2. Threat of New Entrants

• Threat of new entrants to the streaming market is high due to low barriers to entry.

• Numerous websites emerging offering streaming service, including niche streaming.

• No legal barriers or restrictions preventing new companies from entering the market. 

3. Industry Rivalry

• Amazon Prime

• Google TV

• Hulu

• Youtube

• NowTV

• BBC iPlayer

• Disney+

• Britbox

• Apple TV 

4. Threat of Substitutes

• Threat of substitutes for Netflix is low due to the exclusive deals they have with certain companies, and their own production company producing Netflix Originals.

• They have minor threats offering a similar service and similar programs, mainly, Amazon Prime, NowTV, Disney+ and Hulu.

 5. Buyer Power

• Buyer power is incredibly high due to the growing amount of rival streaming services.

• Buyers have multiple choices of streaming services they can go to.

o Customers are loyal to content, not the provider.

o They will go where their favourite TV shows and films are. 

References

Coyne, K. P. & Subramaniam, S., 1996. Bringing Discipline to Strategy. McKinsey Quarterly, 33(4), pp. 14-25.

Dobbs, M. E., 2012. Porter's Five Forces in Practice: Templates for Firm and Case Analysis. Competition Forum, 10(1), pp. 22-35.

Porter, M., 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. 1st ed. New York: Free Press.

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