Porter's five forces analysis is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979. It draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market.
When Michael Porter conceived the five competitive forces model, it propelled strategic management to the very heart of the management agenda. The framework became a centre-piece of texts in business strategy and strategic management, and essential examination material on MBA and similar courses globally. But what has become of his original five competitive forces? It would appear to be the case that not a great deal had occurred to develop this thinking since the early 1980s […]. Porter appears to have been more interested in taking his concepts to an even more macro level, particularly o the competitive advantage of countries, rather than to micro economics. Porter's model, whilst it has done extremely well in occupying textbook soak, does not seem to have captured the imagination of other theorists.
Porter had a great success with his model and it is valid until today. But the industrial environment has changed in the last thirty years, so today entrepreneurs have to handle it very carefully. In the early 1980s the competitive situation was completely different to today´s situation. With a strategy you gained a lot of money thirty years ago, today you could go bankrupt. There was no thinking about globalization and competitors who force their way into a market which comes from the other side of the planet. Changes are more rapid because of the information age. The value chain has become easier because often one company takes the role of the producer, wholesaler and retailer. Porter had not even thought about selling products through the internet without seeing them before.
The five forces framework is undertaken from the perspective of an incumbent organization, i.e. an organization already operating in the industry. The analysis is best used at the level of an organization's strategic business unit (SBU). Although each organization in an industry is unique, the forces within the industry which affect its performance, and hence its profitability, will be common to all organizations in the industry. It is in this sense that Perter's contribution is pervasive - the ability to generalize these five forces to all organizations within the industry.
Generic strategies to counter the five forces. Strategy can be formulated on three levels: - corporate level, - business unit level, - functional or departmental level. The business unit level is the primary context of industry rivalry. Michael Porter identified three generic strategies (cost leadership, differentiation, and focus) that can be implemented at the business unit level to create a competitive advantage. The proper generic strategy will position the firm to leverage its strengths and defend against the adverse effects of the five forces.
In Porter’s Five-Forces Model, "innovation" is a critical element within the process of strategic decision-making. Innovation can be, as Porter observed, “mundane and incremental”, and it can be in the realms of technology or in the ways of doing things. This leaves a lot of room for good ideas from managers involved in strategic decision-making. Any changes or improvements in these areas can lend the corporation competitive advantage.
The degree of rivalry is the center of this model as the other 4 forces branch off of this. Each of the forces influences the nature of competition in the industry. Additionally, organizational strategies are often impacted as companies formulate their strategies in order to respond to the dominant competitive ores in any particular industry.
Porter's five forces determine a company's competitive environment, which affects profitability. The bargaining power of buyers and suppliers affect a small company's ability to increase prices and manage costs, respectively. For example, if the same product is available from several suppliers, then buyers have bargaining power over each supplier. However, if there is only one supplier for a particular component, then that supplier has bargaining power over its customers. Low-entry barriers attract new competition, while high-entry barriers discourage it. For example, opening a home-cleaning business is simple, but starting a manufacturing company is considerably more difficult. Industry rivalry is likely to be higher when several companies are vying for the same customers, and intense rivalry leads to lower prices and profits.
Five Competitive Forces: Michael Porter's Five Forces have become a yardstick for assessing industry profitability. They are: Buyers'/customers' power, Suppliers' power, Rivalry among competitors, Threat of new entrants, Threat of substitute products. The more powerful these forces in an industry, the lower its profit potential. The strength of each force differs by industry and changes over time.
Michael E Porter of Harvard Business School developed the Five Forces analysis in 1979 to overcome the problems of SWOT. The five forces analysis looks at a specific industry to determine how attractive it is, and is supplemented by Value Chain and Generic Strategies analyses to generate results that are specifically useful for developing strategies of an individual firm.
Since its introduction in 1979, Michael Porter’s Five Forces has become the de facto framework for industry analysis. The five forces measure the competitiveness of the market deriving its attractiveness. The analyst uses conclusions derived from the analysis to determine the company’s risk from in its industry (current or potential)