1.3 THE STRATEGIST IN YOU: Porter’s Five Forces

(SHORT NOTES FROM STRATEGY TOOLS:

Core Strategy Tools at http://www.mindtools.com)

 

The Porter's Five Forces tool is a simple but powerful tool for understanding where power lies in a business situation.  it helps to understand both the strength of current competitive position, and the strength of a position you're considering moving into.  Five Forces Analysis assumes that there are five important forces that determine competitive power in a business situation.

Porter’s Five Forces
1	Supplier Power ·        assess how easy it is for suppliers to drive up prices ·        driven by o   the number of suppliers of each key input o   the uniqueness of their product or service o   their strength and control over you o   the cost of switching from one to another ·        The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are
2	Buyer Power ·        Assess how easy it is for buyers to drive prices down ·        driven by o   the number of buyers o   the importance of each individual buyer to your business o   the cost to them of switching from your products and services to those of someone else ·        If you deal with few, powerful buyers, then they are often able to dictate terms to you.
3	Competitive Rivalry ·        Assess the number and capability of your competitors
4	Threat of Substitution ·        affected by the ability of your customers to find a different way of doing what you do ·        If substitution is easy and substitution is viable, then this weakens your power.
5	Threat of New Entry ·        affected by the ability of people to enter your market

Porter's Five Forces Simplified Example: Buying a Farm
THREAT OF NEW ENTRY Time and cost of entry Specialist knowledge Economies of scale Cost advantages Technology protection Barriers to entry	COMPETITIVE RIVALRY Very many competitors Commodity products Low switching costs Low customer loyalty High cost of leaving market
SUPPLIER POWER Moderate number of suppliers Suppliers large Similar products Able to substitute Neutral supplier power	BUYER POWER Few, large supermarkets May be co-operatives Very large orders Homogeneous product Extreme price sensitivity Ability to substitute High buyer power
THREAT OF SUBSTITUTION Some cross-product substitute Ability to import food Some substitution

Porter's Five Forces Analysis is an important tool for assessing the potential for profitability in an industry.