Strategy
Competitive analysis: Porter’s five forces model
Porter’s (1980) competitive analysis identifies five fundamental competitive forces that determine the relative attractiveness of an industry: new entrants, bargaining.
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Competitive analysis: Porter’s five forces model vs Five forces analysis
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Close overlapConceptual / qualitativeFinanceFinance
Strategy
Five forces analysis
This is a way of analysing the attractiveness of an industry.
Read articleChoice logic
Use this when.
Use the framework to understand an existing industry, test entry into a new one or evaluate the attractiveness of a segment. It expands analysis beyond direct rivals to customers, suppliers, substitutes and potential entrants. Repeat it when technology, regulation, consolidation or a business model shift changes the industry boundary or economics.
To understand why an existing industry is more or less profitable than relevant alternatives.
Extracted signals
Strengths, limits, and pitfalls.
Competitive analysis: Porter’s five forces model
- For every force, identify the two or three economic drivers that matter most, the evidence for them and the leading indicator that would show the structure changing.
- Define the industry by product or service, customer need, geography and value chain scope. State the time horizon and gather evidence from customers, suppliers, competitors, financial data and regulation. Then analyse the strength, direction and drivers of each force.
Watch for
- Define the industry carefully and do not turn the framework into a static checklist. A boundary drawn too broadly or narrowly changes every force, while technology, regulation, complementors, and business model change can alter the structure faster than a one time analysis suggests.
Five forces analysis
- Calibrate the story against economics. Compare industry returns with a relevant baseline; average return on invested capital across US industries during 2000–2008 was 12.4 per cent in the cited example. Then concentrate strategy discussion on the one or two forces that most affect future value, while documenting why the others are secondary.
- First define the industry by customer need, geography, product scope and value chain stage. Too broad a boundary hides differences; too narrow a boundary excludes real substitutes and entrants.
- Gather evidence for each force: concentration, switching costs, entry barriers, economics of substitutes, supplier dependence, capacity, growth, margins and observed behaviour. Rate the direction and strength of each force and record the evidence and uncertainty behind the rating.
Watch for
- A completed diagram is not a strategy. The analysis must lead to choices about positioning and activity. The most common error is an ill defined industry boundary—for example, treating all banking as one market when retail banking in a particular country has different buyers, substitutes and rules from commercial banking elsewhere.
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