Introduction
Strategic planning is an essential aspect of running any successful business. By taking a proactive approach to setting goals and anticipating potential challenges, a business can position itself for long-term growth and success. Utilizing various frameworks can help businesses create a strategic plan that has a higher likelihood of success. In this article, we will explore the Porter’s Five Forces Framework and how you can use it in your strategic planning.
This is part of a series of in depth articles regarding Strategic Planning tools and frameworks. Our goal is to provide our clients with useful resources to use in their business. Should you ever feel overwhelmed or need some help with the details, we are happy to discuss how we can help you grow and thrive! Just click here to set up a meeting! You can also email us or give us a call. We are often with clients during the day, but strive to respond within 24 hours.
Feel free to check out the other articles in the series by clicking here!
Ok, let’s get into it!
In this article we will discuss the following:
- Before you Start – Defining and Objective
- What is the Porter’s Five Forces Framework?
- Is Porter’s Five Forces Right for Your Planning?
- The Five Forces
- Force 1: The Threat of New Entrants
- Force 2: Bargaining Power of Suppliers
- Force 3: Bargaining Power of Buyers
- Force 4: The Threat of Substitutes
- Force 5: Competitive Rivalry
- Bringing Them All Together
- Summary
Before you Start
Define your objective
Identify the reason for conducting your analysis and what you hope to achieve from it. This will help guide the analysis and ensure that it is relevant to the business’s goals. Identify the scope of the analysis, it is not always executed for the business as a whole… it can be for a specific division, product line or service, or any other strategic planning activity. So, make sure you scope the analysis to identify what should be included, and sometimes more importantly, what should not.
What is Porter’s Five Forces Framework?
Porter’s Five Forces is a strategic analysis framework developed by Harvard Business School professor, Michael Porter. The model helps businesses to analyze the competitive landscape of their industry and make informed decisions about how to position themselves in the market.
Porter’s Five Forces framework can be incredibly helpful for businesses that want to succeed in a cut-throat marketplace. As you work through this framework, you’ll gain a complete understanding of what’s happening in your industry and the factors that impact how successful your business can be. It’ll help you figure out how attractive your industry is, spot possible threats and opportunities, and make smart choices about where you fit into the market and how you compete.
Porter’s Five Forces can help you get ahead of potential issues from new competition, strike good deals with suppliers, build your bargaining power with customers, set yourself apart from other products or services, and navigate really intense competition. When you understand how all these forces interact, you can see changes coming in the market, adjust your strategies to stay on top, and get an edge over your competitors.
Ultimately, utilizing Porter’s Five Forces empowers you to make strategic choices that position your business for long-term success and profitability in a highly competitive business landscape.
Is Porter’s Five Forces the Right Framework for your Strategic Planning Activities?
While Porter’s Five Forces is a widely recognized framework for strategic planning, it may not be the perfect fit for every business. Some companies may find that certain forces are less relevant to their industry or that they need to consider additional factors not included in the framework. Additionally, the Five Forces model focuses primarily on external factors, neglecting internal factors that can also impact a company’s success.
Therefore, it is important for businesses to find a strategic planning framework that works best for them. This may involve using multiple frameworks to create a comprehensive approach that takes into account both internal and external factors. A customized approach can help businesses identify the most relevant factors affecting their industry and adapt to changes more effectively. Ultimately, the goal of any framework should be to provide a clear understanding of the industry landscape and potential threats and opportunities, allowing businesses to make informed strategic decisions that lead to long-term success.
Comprehensive analysis: The framework offers a comprehensive analysis of a company’s industry environment by considering five different forces. This helps in identifying all the key factors that can impact the company’s profitability and competitiveness.
Structured approach: The framework provides a structured approach for analyzing the competitive environment, which makes it easier to identify the most important factors and prioritize actions.
Strategic insights: The analysis can provide valuable insights into a company’s strategic positioning, including opportunities for growth and areas for improvement.
Risk management: By identifying potential threats and risks, the framework can help companies develop strategies to mitigate these risks and improve their overall resilience.
Limited scope: The framework only considers five forces, which may not capture all the relevant factors that can impact a company’s industry environment. It also focuses primarily on external forces.
Industry-specific: The analysis is highly dependent on the specific industry in which a company operates, which may limit its applicability across industries.
Time-consuming: Conducting a thorough analysis using the framework can be time-consuming and resource-intensive, which may not be feasible for small businesses with limited resources.
Lack of predictive power: The framework provides a snapshot of the current competitive environment, but it does not necessarily predict future trends or changes in the industry.
The Details
OK, time to dive into the details!
So What Are Porter’s Five Forces?
- Threat of New Entrants
- Bargaining Power of Buyers
- Bargaining Power of Suppliers
- Threat of Substitutes
- Competitive Rivalry
Let’s review each of these in more detail, with some examples and ways to apply your findings in your strategic planning!
Force 1: Threat of new entrants
Description
The threat of new entrants refers to the possibility of new businesses entering your industry and disrupting the current market. This could happen for a variety of reasons, such as low barriers to entry or a high demand for new products or services. When there is a high threat of new entrants, it can increase competition, lower prices, and reduce profit margins for existing businesses.
In Practice
Example 1
Let’s take a look at the coffee industry. While coffee has been around for centuries, the specialty coffee market has seen a surge in popularity in recent years. As a result, we have seen a rise in new coffee shops and roasters entering the market, particularly those focused on sustainability and fair trade practices.
With the world becoming more connected, supply chains are easier to access for raw beans and the increase in distributors that can help with accessing them has grown. The relatively large capital investment that was traditionally required to set up a roasting operation has been disrupted by white label roasters and online marketplaces and social media have made the marketing and sales process less geographically restricted.
These changes have all greatly impacted the barriers to entry for new coffee startups, which has in turn saturated this market. This increase in new entrants has led to greater competition and lower prices for consumers, making it more challenging for established businesses to maintain their market share.
The Coffee Industry has a high risk factor for Threat of new entrants. This doesn’t mean that you can’t be successful, but your strategic plan should take this into account as you work through the details of your intended path. Weigh this force against the other forces, and you may find a hole in the market that you can exploit, like the white label rosters did. They utilized a known barrier as an exploit, by knocking it down and lowering the entry risk for new entrants while creating an entirely new submarket.
Key Takeaway
As a business owner, it is crucial to recognize that the threat of new entrants can impact your industry’s profitability and success. By conducting a thorough analysis of the barriers to entry in your industry and identifying potential new entrants, you can devise strategies to mitigate this force’s risk. This could include investing in high barriers to entry, such as patents or regulatory approvals, or by establishing brand recognition and customer loyalty to create a competitive advantage. By taking proactive steps to address the threat of new entrants, businesses can better position themselves to succeed in the long run.
How to apply your findings
Analyzing the threat of new entrants is crucial in strategic planning because it can help businesses identify potential risks and opportunities related to competition. By understanding the power dynamics between your business and potential new entrants, you can identify potential challenges and devise strategies to mitigate them.
As the above examples have shown, if you are in an industry where there are low barriers to entry, you may face significant competition from new entrants who can enter the market and disrupt your business. In such a case, you can take steps to make it harder for new entrants to compete with you, such as building a strong brand, developing customer loyalty, and creating barriers to entry such as high start-up costs or complex regulatory requirements.
On the other hand, if your business operates in an industry with high barriers to entry, such as high capital requirements, complex regulatory requirements, or economies of scale, you may be able to protect yourself from new entrants. In this case, you can focus on building and leveraging your strengths to maintain your competitive advantage and protect your market share.
Overall, the analysis of the threat of new entrants can help businesses better understand their competitive landscape, identify potential risks and opportunities, and devise strategies to ensure a stable and profitable business model that supports their strategic objectives.
Force 2: Bargaining power of suppliers
Description
The bargaining power of suppliers is another key force that can impact the profitability and success of a business. In this context, suppliers refer to the companies or individuals that provide the raw materials or components that your business needs to operate. When suppliers have a lot of bargaining power, they can negotiate higher prices, stricter contract terms, or even limit the availability of critical resources.
In Practice
Example 1
To illustrate this concept, let’s look at the airline industry. Airlines depend on a variety of suppliers to provide essential components such as engines, avionics, and fuel. Some suppliers have a significant amount of bargaining power due to the specialized nature of their products, the limited number of suppliers available, or the high cost of switching suppliers.
For example, engine manufacturers such as GE Aviation and Rolls-Royce have a lot of bargaining power in the airline industry. This is because there are only a few companies that produce commercial jet engines, and the high cost of these engines makes it difficult for airlines to switch suppliers. There is also a high design lock-in factor. It is incredibly expensive to qualify a new critical component, such as an engine, and certify it for flight…let alone flight with public passengers. As a result, engine manufacturers can negotiate high prices and long-term contracts that are advantageous to their business.
Example 2
Another example of suppliers with high bargaining power can be seen in the soft drink industry. Companies such as Coca-Cola and PepsiCo have significant bargaining power over their suppliers of raw materials such as sugar and corn syrup, as well as bottling and canning products. These companies have incredibly high volumes of forecastable demand and have established long-term relationships with their suppliers, which gives them leverage to negotiate favorable pricing and contract terms. In some cases, these companies have even invested in their own sugar or corn syrup production facilities and their own bottling and canning plants to further reduce their dependence on external suppliers, which only serves to bolster their already powerful bargaining power.
Key Takeaway
As a business owner, it is essential to understand the bargaining power of your suppliers and develop strategies to mitigate any risks associated with this force. By identifying alternative suppliers or developing stronger relationships with existing suppliers, you can increase your bargaining power and negotiate more favorable terms that can help your business succeed in the long run.
How to apply your findings
Analyzing the bargaining power of suppliers is crucial in strategic planning because it can help businesses identify potential risks and opportunities related to their supply chain. By understanding the power dynamics between your business and your suppliers, you can identify potential challenges and devise strategies to mitigate them.
As the above examples have shown, if you are in an industry where there are only a few dominant suppliers, they may have significant bargaining power over your business. In such a case, the supplier can dictate terms such as pricing, delivery schedules, and product quality, which can negatively impact your profit margins or even your ability to meet customer demands. However, if you identify this challenge, you can look for ways to diversify your supplier base or develop closer relationships with your existing suppliers to reduce your dependence on them.
On the other hand, if your business has significant bargaining power over your suppliers, you may be able to negotiate favorable terms such as lower prices or better payment terms. This could potentially reduce your operating costs and improve your bottom line or allow you to out price your competition. By understanding the bargaining power of suppliers, you can devise a strategic approach that takes advantage of your strengths while mitigating risks associated with any weaknesses.
Overall, the analysis of bargaining power of suppliers can help businesses better understand their supply chain dynamics, identify potential risks and opportunities, and devise strategies to ensure a stable and cost-effective supply chain that supports their strategic objectives.
Force 3: Bargaining power of buyers
Description
Another key force that can impact the profitability and success of a business is the bargaining power of buyers. In this context, buyers refer to the customers or clients that purchase goods or services from your business. When buyers have a lot of bargaining power, they can negotiate lower prices, better quality, or even switch to another supplier.
In Practice
Example 1
To illustrate this concept, let’s look at the grocery industry. Grocery stores depend on a variety of suppliers to provide essential products such as fresh produce, meat, and dairy. Buyers, in this case, the grocery store chains, have significant bargaining power over their suppliers due to their high purchasing volumes and the abundance of available suppliers. Grocery stores can negotiate lower prices and better quality with their suppliers by leveraging their purchasing power. In some cases, grocery stores have even created their own private label products to reduce their dependence on external suppliers and further increase their bargaining power.
Example 2
Another example of buyers with high bargaining power can be seen in the technology industry. Consumers have significant bargaining power over technology companies due to the abundance of available options and the ease of switching between them. For example, consumers can compare prices and features of smartphones from different brands before making a purchase decision. If a technology company raises its prices too high or delivers poor quality products, consumers can easily switch to a competitor. This puts pressure on technology companies to maintain competitive pricing and product quality to retain their customers.
Key Takeaway
As a business owner, it is essential to understand the bargaining power of your buyers and develop strategies to meet their needs while maintaining profitability. By identifying your buyers’ preferences and expectations, you can tailor your products or services to meet their demands and increase customer loyalty, which can help your business succeed in the long run.
How to apply your findings
Analyzing the bargaining power of buyers is crucial in strategic planning because it can help businesses identify potential risks and opportunities related to their customer base. By understanding the power dynamics between your business and your buyers, you can identify potential challenges and devise strategies to mitigate them.
As the above examples have shown, if you are in an industry where buyers have significant bargaining power, they may dictate terms such as pricing, quality, or delivery schedules. In such a case, you can look for ways to differentiate your products or services, provide better customer service, or even create loyalty programs to retain your customers. By doing so, you can increase customer loyalty and reduce the risk of losing customers to competitors.
On the other hand, if your business has significant bargaining power over your buyers, you may be able to negotiate favorable terms such as higher prices or better payment terms. This could potentially increase your profit margins and improve your bottom line. However, it is essential to balance your bargaining power with your customers’ needs and expectations to avoid losing customers to competitors.
Overall, the analysis of bargaining power of buyers can help businesses better understand their customer base, identify potential risks and opportunities, and devise strategies to ensure customer satisfaction while maintaining profitability. By doing so, businesses can create a sustainable and profitable customer base that supports their strategic objectives
The degree to which buyers can exert influence over the price and quality of goods or services.
Force 4: Threat of substitute products or services
Description
The threat of substitute products or services is another crucial force that businesses must consider when analyzing their competitive environment. In this context, substitutes refer to products or services that can fulfill the same customer needs or desires as the company’s products or services. When there are many substitute products or services available, customers have more options to choose from, which can lower demand for the company’s products and services.
In Practice
Example 1
An excellent example of substitute products can be seen in the food industry. For instance, if a company produces high-end, organic foods that are expensive, customers may opt to purchase cheaper, conventional foods as a substitute. In this scenario, the company may see a reduction in demand for its products, as customers switch to cheaper alternatives that fulfill the same nutritional needs.
Example 2
Another example of substitutes can be found in the technology industry. For instance, desktop computers used to be the primary computing device for most people, but the rise of smartphones and tablets as substitutes has decreased demand for traditional desktop computers. Customers now have more options to choose from when it comes to computing devices, which has lowered demand for traditional desktop computers.
Key Takeaway
As a business owner, it is essential to understand the potential substitutes for your products or services and develop strategies to mitigate any risks associated with this force. By identifying alternative products or services that may fulfill similar customer needs, you can adjust your business strategy accordingly and stay ahead of the competition.
How to apply your findings
Analyzing the threat of substitute products or services is crucial in strategic planning because it can help businesses identify potential risks and opportunities related to their competitive environment. By understanding the power dynamics between your business and substitute products or services, you can identify potential challenges and devise strategies to mitigate them.
As illustrated above, if you are in an industry where there are many substitute products or services available, you may need to find ways to differentiate your products or services from the competition. For instance, you could focus on providing superior customer service, offering more customization options, or creating unique marketing campaigns to appeal to your target audience.
On the other hand, if your business has a unique selling proposition that sets it apart from substitute products or services, you can leverage this to your advantage. By highlighting your unique value proposition, you can convince customers to choose your products or services over the substitutes available in the market.
Overall, analyzing the threat of substitute products or services can help businesses better understand their competitive environment, identify potential risks and opportunities, and devise strategies to ensure that they stay ahead of the competition. By developing a comprehensive understanding of this force, businesses can make informed decisions that support their strategic objectives and help them succeed in the long run.
Force 5: Competitive rivalry
Description
Competitive rivalry is another key force that can impact the profitability and success of a business. This force refers to the degree of competition within an industry and the intensity with which businesses compete against each other. When competitive rivalry is high, businesses must work harder to differentiate themselves from their competitors and maintain a competitive advantage. This can result in lower profit margins and higher costs as businesses engage in price wars, marketing campaigns, and other efforts to attract customers.
In Practice
Example 1
To illustrate this concept, let’s look at the fast-food industry. This is an industry with intense competitive rivalry, where businesses compete fiercely for market share. Fast-food chains such as McDonald’s, Burger King, and Wendy’s all offer similar products at similar price points, and they all compete for the same customer base. To stand out from their competitors, fast-food chains invest heavily in marketing and advertising campaigns to create a unique brand identity and differentiate themselves from their competitors. They also engage in promotional activities such as offering discounts, meal deals, and limited-time menu items to attract customers and encourage repeat business.
Example 2
Another example of intense competitive rivalry can be seen in the smartphone industry. Apple and Samsung are two of the largest players in this industry, and they compete aggressively for market share. Both companies invest heavily in research and development to create new and innovative products that offer unique features and capabilities. They also engage in extensive marketing campaigns to create a strong brand identity and differentiate themselves from their competitors. In addition, both companies offer loyalty programs, discounts, and other incentives to retain customers and encourage repeat business.
Key Takeaway
As a business owner, it is essential to understand the level of competitive rivalry in your industry and develop strategies to differentiate yourself from your competitors. By identifying your unique selling points and creating a strong brand identity, you can stand out from your competitors and attract customers. You can also explore new markets or customer segments that may be less saturated and offer greater opportunities for growth.
How to apply your findings
Analyzing the level of competitive rivalry in your industry is critical in strategic planning because it can help businesses identify potential threats and opportunities related to their competition. By understanding the intensity of competition and the strategies used by your competitors, you can identify potential challenges and devise strategies to mitigate them.
As the above examples have shown, if you are in an industry with intense competitive rivalry, it may be challenging to differentiate yourself from your competitors. However, by identifying your unique selling points and creating a strong brand identity, you can stand out from your competitors and attract customers. You can also explore new markets or customer segments that may be less saturated and offer greater opportunities for growth.
On the other hand, if your business operates in an industry with lower competitive rivalry, you may have greater opportunities to differentiate yourself from your competitors and attract customers. In such a case, you can explore new markets or customer segments that are not currently served by your competitors or invest in research and development to create innovative products that offer unique features and capabilities.
Overall, the analysis of competitive rivalry can help businesses better understand their industry dynamics, identify potential threats and opportunities, and devise strategies to maintain a competitive advantage that supports their strategic objectives.
Bringing them all together
Leveraging the Five Forces model in conjunction can be a powerful approach to strategic planning. By analyzing the interplay between these forces, businesses can identify opportunities and threats, and develop strategies that leverage their strengths and mitigate their weaknesses.
For example, consider a small coffee shop chain that operates in a highly competitive market with multiple rivals. By analyzing the five forces, the company can identify potential threats and opportunities that can inform its strategic planning.
Threat of New Entrants
The coffee shop chain identifies that the barrier to entry is relatively low, and new competitors can quickly enter the market. However, the company also notes that it has established a loyal customer base, brand recognition, and economies of scale that new entrants may struggle to match.
Bargaining Power of Buyers
The coffee shop chain recognizes that customers have high bargaining power and can easily switch to competitors if they offer lower prices or better service. Therefore, the company focuses on providing a unique customer experience that differentiates it from competitors and builds customer loyalty.
Bargaining Power of Suppliers
The coffee shop chain identifies that suppliers have low bargaining power as there are many coffee bean and milk suppliers in the market. However, the company leverages its purchasing power to negotiate favorable prices and contract terms with its suppliers.
Threat of Substitutes
The coffee shop chain acknowledges that there are substitute products such as tea, energy drinks, and even soft drinks. Therefore, the company expands its product offerings to include various tea blends and energy drinks, providing customers with more options and reducing the likelihood of them switching to substitutes.
Competitive Rivalry
The coffee shop chain understands that the market is highly competitive, and rivals are always seeking ways to gain an edge. To remain competitive, the company invests in its marketing efforts, improving its product offerings, and focuses on building strong customer relationships.
By analyzing and leveraging the Five Forces model, the coffee shop chain can develop a comprehensive and well-rounded strategic plan that addresses potential threats and opportunities. This approach allows the company to play to its strengths, mitigate weaknesses, and stay ahead of the competition. Businesses in any industry can similarly leverage the Five Forces model to inform their strategic planning and ensure they are well-positioned to succeed in the long term.
Summary
Thank you for taking the time to explore Porter’s Five Forces and their impact on strategic planning. These forces are a framework used to analyze the competitive landscape of an industry and to identify potential risks and opportunities for businesses operating within that industry.
The five forces include the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, the threat of substitute products or services, and competitive rivalry. Each force has the potential to impact a business’s profitability and success in different ways.
Analyzing the threat of new entrants helps businesses to identify potential competition in the industry, which can drive down prices and erode profit margins. The bargaining power of suppliers and buyers can impact pricing, availability of resources, and contract terms. The threat of substitute products or services can also impact pricing and demand for a business’s offerings. Finally, competitive rivalry can impact market share and pricing.
By analyzing each of these forces, businesses can develop strategies to mitigate risks and capitalize on opportunities. For example, a business with a strong bargaining position relative to its suppliers can negotiate better prices and contract terms, while a business facing significant competition may need to focus on differentiating its products or services.
Overall, understanding the five forces and their impact on an industry is a crucial component of strategic planning. By applying this framework, businesses can develop strategies that are better aligned with the competitive landscape of their industry, and that ultimately support their long-term success.
More in the Series
