Using the 5 forces analysis for strategic thinking
Have you ever agonized on how, where and when you should make major strategic changes? Using the now proven 5 Forces Analysis can help to objectify tough strategic decisions and improve your competitive advantage.
In 1979, the tired and inadequate SWOT analysis went out the window when Harvard’s Michael Porter introduced his 5 Forces Analysis. It helps companies to realize improved profits, competitiveness and clearer strategy. It improves your understanding of both the strengths of your current competitive position and the strengths of a position you are considering moving into.
UNDERSTANDING THE 5 FORCES
1. Competitive Rivalry: What is the number and capability of the significant competitors you must consider? Do you have relatively equal products and services amongst competition, or do you have distinct competitive advantages over the competition?
2. Supplier Power: How easy is it for suppliers to drive up prices? How unique are the products and services of your key inputs? How abundant or scarce are quality suppliers?
3. Buyer Power: How easy is it for buyers to drive prices down? How little does it cost a customer to switch to a competitor? Is there a large abundant market of buyers or a relatively tight small market?
4. Threat of Substitution: What is the likelihood and ease with which customers can find a different way to do what you do?
5. Threat of New Entry: What is the ability and ease with which new competitors can enter your market? Do you have strong or little protection around your key technologies? Are there high or low barriers of entry into your market?
USING THE 5 FORCES IN STRATEGIC
THINKING PAST TRENDS
First consider the trends and shifts of the recent past in your industry. What have been the specific trends in each of the 5 Forces? Has competition become more and more intense? Have suppliers and buyers had increasing power? Has the threat of substitutes increased in the past? Have new competitors been entering your industry or have they been leaving?
Current Trends. Trends change. While the last three, five or 10 years may have been shifting in one direction with any of the 5 Forces, currently what is the state of that force?
Analyze each area as to what you, your team and objective third parties believe to be the direction of each force currently.
Future Anticipated Trends. Although a force may be currently moving in one direction, a change may be imminent. Consider what developments are likely and list them out. Include possible problems that could arise, as discussed in our Potential Problems Analysis article.
Prioritizing Action. After your analysis, you can begin to prioritize actions for implementation around the objective of optimizing and protecting profitability. This is done by countering the power and thus pro_ t-draining impact within each force. Within each force there may be many opportunities for your team to take action that may improve profitability.
Ultimately by using the 5 Forces Analysis you can begin leading your industry with profit improving innovation that also derives ever greater value for your customers and the market.