How to Perform a Five Forces Analysis

Tue, Sep 14, 2010

Strategy and Execution

We recently discussed what a SWOT analysis is and why performing one for your business could be beneficial. There is another analysis that is often used at the same time as a SWOT because it is also relatively easy and inexpensive to do.  It is known as Porter’s Five Forces Analysis.

 The analysis was created by Harvard business professor, Michael E. Porter and has since been used as a useful tool to evaluate an organization’s structure and strategy.

 The five forces that Porter defined are:

  • Supplier Power or Bargaining Power of the Supplier
  • Buyer Power or Bargaining Power of the Buyer
  • Threat of New Entry
  • Threat of Substitution
  • Competitive Rivalry, the force affected by the four above forces

1. Supplier Power

Basically the fewer suppliers there are the more powerful they are. Also, if the product is very unique then the suppliers are more powerful.

Ask yourself, how easy would it be for your suppliers to raise the cost of their products?

Would you be able to easily go to a competitor?

And what is the cost to your business of switching suppliers? All this determines the power of your suppliers.

2. Buyer Power

Essentially the more choices a buyer has the more powerful the buyer is. 

Is the buyer easily able to substitute your product with another product? Then the buyer is more powerful.

The fewer and more powerful the buyers, the more likely they will be able to call for lower prices of a product or service.

3. Threat of New Entry

How easy is it for a competitor to enter your market?

If it is time consuming or expensive then it may be fairly difficult for a new company to swoop in and steal a portion of your market share.

If that is not the case then the threat of new entries is high. That would especially be the case in markets where the profit margin is very high.

4. Threat of Substitutions

The threat of substitutions asks how easy it would be for your customers to find a substitute for your product. It may not necessarily be a direct competitor.

Consider the case of phones. Many people are opting not to have a landline and choosing to go with just a cell phone. They are substituting the landline in this case.

 5. Competitive Rivalry

If you have a large number of competitors then chances are you have little power in the market because suppliers and buyers can easily go to another company if they don’t like the deal you are offering.

However, if your product is very unique in the market, then most likely your competition will be low.

A Five Forces Analysis should help you get a deeper perspective on the general attractiveness and profitability of your industry. Conducting a Five Forces Analysis will provide your business with a clearer picture of the forces that closely affect your business. You can do your own Five Forces analysis with this worksheet from Mindtools.

By Sara Beck. Sara is an MBA student and loves to travel. She blogs at www.sarabeck.wordpress.com.

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