Applying the 5 forces may involve asking questions such as:
This is done by going through each of the 5 forces in order and applying them to the business in question. He also recommends that any business operating within a single industry should carry out at least one 5 forces analysis. Porter points out that the 5 forces methodology should be applied at the highest level of an industry - the line-of-business. The 5 forces model is most commonly used as a starting point for business strategy consultants when assessing a company’s position in the market. Positioning products optimally requires a deep understanding of competitor practices, including pricing and marketing strategies. This factor refers to the intensity of competitor rivalries within the industry. Whether it’s raw materials, labor, or services, the more companies in an industry, the greater market power suppliers will wield.Ĭompetitive rivalry. If a business has very few options when it comes to suppliers, the power of those suppliers goes up. This can impact a customer’s price-sensitivity and create additional pressure for a business.īargaining power of suppliers. If customers have lots of different options to choose from in an industry, they’re said to have a lot of bargaining power. public transport, and so on.īargaining power of customers. For example, meat-free alternative foods, self-driving cars vs. This refers to the concept of a different product or service solving the same user problem. It’s only natural that profitable industries will attract new competitors to the market, which, over time, actually dilutes the overall profitability of an industry while increasing competitive rivalry. So those are the basics, but what are the 5 forces?
The more intense the competition within an industry, the more attractive - and thus more profitable - it could be. The 5 forces model was primarily developed as a competitive strategy analysis tool, giving businesses and analysts alike the ability to evaluate the competitive landscape within a specific sector. By assessing all these criteria, the business gets a holistic view of its viability, competitiveness, and potential profitability. Porter’s "the 5 forces" model helps businesses analyze their standing in the market, looking at potential threats from new competitors, weaknesses within the organization, how much power their customers and suppliers hold in sustainable growth, and more.