5 Competitive Forces That Should Be Shaping Your Strategy

Every MBA student or undergraduate in an introductory business strategy course has encountered Porter’s Five Forces. The concept, outlined by Harvard economist and professor Michael E. Porter in 1979, has been a foundation of business strategy in both academia and the business world for decades.

Professor Porter revisited the topic in a recent article in Harvard Business Review, appropriately titled “The Five Competitive Forces that Shape Strategy.”

For those unfamiliar with the five forces, they are:

  • Rivalry Among Existing Competitors: How much competition is in your industry? If you’re Coca-Cola or Pepsi, you might be sitting in a comfortable bipolar soft drink world with soft competition and comfortable margins. If you’re in the wireless service industry, the situation might be a little more fierce.
  • Bargaining Power of Suppliers: How much influence do your suppliers have over you? Can you easily switch between suppliers if they decide to increase prices or if their quality decreases? Why does it matter? Porter points to the Hollywood’s power over movie theaters that have just a handful of sources of films to choose from as a good example.
  • Bargaining Power of Buyers: The key here is the availability of alternative choices. Think of big cable companies like Comcast. If the telecommunications giant decides to raise prices or delivers sub-standard customer service, the buyers (cable customers) have little recourse. On the other hand, think of the customer in a convenience store looking to buy a candy bar. A very different situation!
  • Threat of New Entrants: You may think that any business is vulnerable to new entrants; however, there are a variety of factors that can help protect existing companies. Large upfront costs or existing infrastructure, government regulation, long-term brand affiliation and distribution networks are just a few examples.
  • Threat of Substitute Products or Services: Substitutes aren’t the same as direct competitors. Domino’s and Toppers are direct competitors. McDonald’s, frozen pizzas and even upscale sit-down restaurants are substitutes that meet more or less the same need. They represent “any other alternative.” As these substitutes become more attractive relative to your business, you face increasing stress on your ability to generate sales.

Whatever industry your organization is in, Porter’s Five Forces provides a great framework for internal discussions about business strategy. Whether you studied the framework in school and think it could be a useful refresher, or you have never heard of it, it’s a more in-depth option to the traditional SWOT analysis. Porter’s strategy just might lead you to uncover insights that could lead to more innovative strategies.

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The Everything Guide to Customer Engagement

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