Assess the balance of power in a business situation, with
James Manktelow & Amy Carlson.
The Porter's Five Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you're considering moving into.
With a clear understanding of where power lies, you can take fair advantage of a situation of strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of your planning toolkit.
Conventionally, the tool is used to identify whether new products, services or businesses have the potential to be profitable. However it can be very illuminating when used to understand the balance of power in other situations.
Five Forces Analysis assumes that there are five important forces that determine competitive power in a business situation. These are:
These forces can be neatly brought together in a diagram like the one in figure 1 below:
Figure 1 – Porter's Five Forces
To use the tool to understand your situation, look at each of these forces one-by-one and write your observations on our free worksheet.
Brainstorm the relevant factors for your market or situation, and then check against the factors listed for the force in the diagram above.
Then, mark the key factors on the diagram, and summarize the size and scale of the force on the diagram. An easy way of doing this is to use, for example, a single "+" sign for a force moderately in your favor, or "--" for a force strongly against you (you can see this in the example below).
Then look at the situation you find using this analysis and think through how it affects you. Bear in mind that few situations are perfect; however looking at things in this way helps you think through what you could change to increase your power with respect to each force. What’s more, if you find yourself in a structurally weak position, this tool helps you think about what you can do to move into a stronger one.
This tool was created by Harvard Business School professor, Michael Porter, to analyze the attractiveness and likely-profitability of an industry. Since publication, it has become one of the most important business strategy tools. The classic article which introduces it is "How Competitive Forces Shape Strategy" in Harvard Business Review 57, March – April 1979, pages 86-93.
Martin Johnson is deciding whether to switch career and become a farmer – he's always loved the countryside, and wants to switch to a career where he's his own boss. He creates the following Five Forces Analysis as he thinks the situation through:
Figure 2 – Porter's Five Forces Example: Buying a Farm
This worries him:
Unless he is able to find some way of changing this situation, this looks like a very tough industry to survive in. Maybe he'll need to specialize in a sector of the market that's protected from some of these forces, or find a related business that's in a stronger position.
Porter's Five Forces Analysis is an important tool for assessing the potential for profitability in an industry. With a little adaptation, it is also useful as a way of assessing the balance of power in more general situations.
It works by looking at the strength of five important forces that affect competition:
By thinking about how each force affects you, and by identifying the strength and direction of each force, you can quickly assess the strength of your position and your ability to make a sustained profit in the industry.
You can then look at how you can affect each of the forces to move the balance of power more in your favor.
For more information on this tool, and on Michael Porter's approaches to competitive analysis, read Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter.
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