How can Porter’s Five Forces help you build your strategy?
Porter’s Five Forces is a method designed to help you understand the competitive forces in your chosen business environment and identify whether or not your strategy is profitable. The tool utilizes five competitive forces that exist in define every industry. Through these forces, you are able to see the strengths and weakness of an industry. Understanding the competitiveness of an industry will help you to build a strategy that gives your business a competitive advantage.
What are the Five Forces?
1. Competition in the Industry – Are their competitors offering similar products?
2. Potential of new entrants – Are new business easily able to enter the market? 3. Power of suppliers – Is it easy for your suppliers to raise their prices?
4. Power of customers – Can your customers force you to lower your prices?
5. Threat of substitution – Can your product be substituted for something cheaper?
While using Porter’s Five Forces, you must ask yourself each of these questions. If you answer yes to some or all of these, you may need to consider rethinking your strategy. If you are considering entering into a new market, utilizing the Five Forces tool can help you make that decision. Each one of these forces can work for you or against you. As a result, you will need to consider each individual force and identify how it can affect your business. Understanding your results will help you make wise choices when it comes to suppliers, positioning, and development.
How to use the tool
The first step to using Porter’s Five Forces tool is to brainstorm. The tool lists a number of factors relevant to each force. You will as well need to brainstorm a list of factors that are relevant to your specific product or service. Once the list of factors has been created, you will then need to compare your list with the factors listed within the tool. This will help you to see the results and help you figure out what concerns you have and determine what strategic changes you can make to be profitable long-term.
A template is provided below where you can enter your information and begin discovering what strategic changes you can make.
TEMPLATE: How to Use Porter’s Five Forces
1. After viewing the factors to consider for each force, make a list of the relevant factors spe cific to your market
2. Write in the factors on the template under the corresponding force
3. Determine whether the individual force works for you. Did it help you? Or did it work against you? or is neutral, and label them as such.
4. Think about changes you can make to improve your position
EXAMPLE: High-end Women’s Clothing
To find more information on Porter’s Five Forces, head over to Mind Tools.
By: Samantha Barfus