Porter’s Five Competitive Forces (Part I)

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    Every business has competitors for its customers, who, after all, get to choose. Most business plans only focus on existing competitors. While that’s necessary, it’s not sufficient. You also need to look at the underlying structure of your industry, and assess the extended rivalry that exists within that structure. One way to do that is to apply the work of Michael Porter, which looks at the five competitive forces that (should) shape strategy.

    In industries where some or all of these are strong forces, profitability is very difficult. For example, suppliers might have unusual bargaining power — perhaps there’s only one supplier for something you really need– or there might be substitute products or services that represent as big a threat as your direct competitors. Similarly, if there are low barriers to entry, threats come not only from existing companies, but also from new ones that could emerge suddenly.

    Alternatively, where these forces are weak, profitability is much easier. Perhaps there are no real substitutes to your offerings, or you might have superior bargaining power with your suppliers.

    Quoting Michael Porter: “The strongest competitive force or forces determine the profitability of an industry and become the most important to strategy formulation.”

    Put differently, an industry can be considered less “attractive” if there is a great deal of intensity in these forces, which then drives down profitability for all of the firms in that industry.

    The challenge, then, in the business planning process, is to analyze these forces as they will impact your company, and then evaluate (or alter) your company’s unique core competencies and business model in an effort to achieve profits greater than the industry average. But don’t let optimism write your business plan. Instead, be analytical and realistic about what is and is not feasible, given your industry structure.

    The next blog will review each of the five forces.

    Good luck!

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    For more resources, see our Library topic Business Planning.