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Porter's
Five Forces
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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:
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 through how each force affects you, and by identifying the strength and direction of each force, you can quickly assess the strength of the 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.
The next article shows you how to use PEST Analysis. PEST is a rigorous technique for understanding the 'big picture' of change that you face. This is important because of the many opportunities and threats that accompany change.To read this, click "Next article" below. Other relevant destinations are shown in the "Where to go from here" list underneath.
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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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