PORTER’S COMPETITIVE FORCES

Application: Competitive Analysis, Market Analysis, Strategy Development

Figure P.2: A representation of Porter’s five forces of competitive intensity

(see Porter, M.E., 1990)

The Concept

Harvard’s Michael Porter is one of the most influential strategy professors living today. Amongst his impressive and prodigious work on competitive strategy he offered a powerful conceptual framework (Porter, M., 1995) which works well as part of the market analysis and strategy development process. His “five forces” of competition are a useful checklist for marketers to work through when analysing a market. They are:

• The power of buyers. Buyers can influence a market by forcing down prices, by demanding higher service and quality, or by playing competitors off against each other. Porter suggested that there are a number of circumstances when a buyer group is powerful including: if they are concentrated, if buying commodities or components, if driven to get price cuts, or if the purchase is unimportant to them.
• The power of suppliers. Suppliers can exert power in a market by raising prices or reducing the quality of the offer. They can squeeze profitability out of the industry. They are powerful if: there are only a few, they have unique offers, are not obliged to compete, threaten forward integration, or are not part of an important industry to the buyers.
• The threat of new entrants: These bring new capacity, the desire for market share and resources. The seriousness of the threat depends on barriers to entry which have six sources: economies of scale, product differentiation, capital requirements, cost advantages, access to distribution, and government policy.
• The threat of substitute offers. These affect the profit of an industry by placing a ceiling on what it can charge through offering an alternative price/feature option. They can reduce demand for a whole product class as new ways of provision suck out demand.

The concept can simply be used as a checklist to prompt marketers to cover relevant issues during market analysis and strategy development. However, it is most powerful when good analysis is put behind the thinking so that judgements can be made with the benefit of real data. Industry reports and original research can be summarized into the model and used as criteria by which to develop competitive responses or critical success factors. The tool can be used to guide debate and is also effective as a communications device. Its clarity summarizes graphically and quickly the competitive landscape and can be used as part of the rationale for competitive programmes. It is best used, though, as a background planning tool in the market planning process.

History, Context, Criticism, and Development

The power of this tool is that it stops marketers or other executives from looking too parochially at competition. They are prompted to think through, for example, fundamental threats from newer competitive forces (such as laser surgery instead of glasses) and the threats to barriers of entry (as, for example, lawyers are experiencing as technology commoditizes their offer and undermines years of training as a barrier to entry).

Where an organization has a range of different businesses, this technique ought to be used to understand the effects on different business units rather than the total organization. Marketers ought to think broadly about the potential forces affecting their businesses and how they might develop into the future. Basing this sort of strategic development around one snapshot in time produced in an informal brainstorming meeting is dangerous. People need to step back and consider how these inter-related factors will, like the earth’s tectonic plates, change the fundamental landscape in which the business operates. If not, this form of analysis can be superficial and ineffective.

Some people find this sort of analysis difficult to get a grip on and too complex or technical. It ought to be communicated simply and used as a guide for the intuitive discussion amongst practising executives.

Voices and Further Reading

• Porter, M.E., “How competitive forces shape strategy”. Harvard Business Review, March–April 1979.
• Porter, M.E., Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press, 1980.
• Porter, M.E., Competitive Advantage of Nations. Free Press, 1990.
• Porter, M.E., On Competition, Harvard Business Review book, 1995.
• “The state of competition in an industry depends on five basic forces … The collective strength of these forces determines the ultimate profit of an industry … Different forces take on prominence, of course, in shaping competition in each industry. … Every industry has a underlying structure, or set of fundamental economic and technical characteristics, that gives rice to these competitive forces. The strategist wanting to position his or her company to cope best with its industry environment or to influence that environment in the company’s favor, must learn what makes the environment tick.” Porter, 1995.
• “The five forces framework can be used to gain insights into the forces at working the industry environment of an SBU which needs particular attention in the development of strategy. It is important to use the frame for more than simply listing the forces.” Johnson, G. and Scholes, K., 2002.

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