Porter's Five Forces Video
Assess the balance of power in a business situation,
with James Manktelow & Amy Carlson.
James Manktelow: Hello, I'm James Manktelow, CEO of MindTools.com, home to hundreds of free, career-boosting tools and resources.
Amy Carlson: And I'm Amy Carlson from Mind Tools.
In business, your ability to make a good profit depends on how strong your position is in the market.
For instance, do you have any competitors offering similar products?
Is it easy for people to enter your market if they see that you're making a profit?
Can customers bully you into lowering your prices?
If we don't think about our position in the market carefully, we can easily find that we're working very hard, yet still struggling to stay afloat.
JM: This is where a tool like Porter's Five Forces is useful.
The tool was created to help us discover who has the most power in a given situation. It can also help us to see if a product or service is likely to be profitable.
The tool assumes that there are five forces that determine competitive power in a business situation.
These elements are supplier power, buyer power, competitive rivalry, threat of substitution, and threat of new entry.
Any of these five forces can work for or against you, so it's important to understand how they affect you.
AC: To use Porter's Five Forces as an analysis tool, you need to look at each force on its own.
For instance, with Supplier Power, you need to look at how easy it's going to be for suppliers to drive up prices.
If you have a lot of suppliers to choose from, you can switch to a cheaper one if your current supplier gets too expensive.
If there are only a few suppliers, then you'll have fewer options, which means that individual suppliers hold more power over you.
Next, look at Buyer Power. How easy is it going to be for your customers to drive down prices?
If you only have a few, powerful customers, then they're going to be in control. If you have more customers, then you'll have more power.
JM: Then you look at your Competitive Rivalry.
How many competitors are there? Are their products or services as good as yours? Or can you create a situation where you have a strong competitive advantage?
Next you look at the Threat of Substitution. How easy is it for your customers to find another way to get what you're offering? The easier it is, the less power you have.
Finally, look at how easy it's going to be for other people to enter the market. The easier it is for new competitors to swoop in, the harder you'll find it to make a profit.
AC: Once you've completed a five forces analysis, you'll be able to see clearly where you're at risk so you can take steps to overcome those risks.
And, if you're thinking about entering a new market, you can see at a glance how profitable you'll likely to be.
JM: You can find out more about Porter's Five Forces, including how to do an in-depth analysis, in the article that accompanies this video.