Strategy
Five forces analysis
This is a way of analysing the attractiveness of an industry.
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Five forces analysis vs The five forces (Porter)
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Strategy
The five forces (Porter)
That is the basic premise of Michael Porter’s work. And he went on to describe in detail what the fundamental forces are which drive competitive intensity.
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Use this when.
To understand why an existing industry is more or less profitable than relevant alternatives.
Use it whenever assessing the attractiveness, evolution or boundaries of an industry.
Extracted signals
Strengths, limits, and pitfalls.
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.
The five forces (Porter)
- Analyse each force as a driver of price, cost or investment, and include regulation and other external institutions where they materially alter competition.
- Define the industry and customer need before scoring anything. A boundary that is too narrow hides substitutes; one that is too broad averages away meaningful economics. Analyse current conditions and the direction of change for each force.
- Rivalry among existing competitors
Watch for
- Industry boundaries are analytical choices. A rigid definition can hide substitutes, complements and changing business models, producing a false conclusion.
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