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Porter’s Five Forces Framework was first published in the Harvard Business Review in 1979 by famed academic Michael Porter, and has come to be renowned as a seminal management framework. Since then, the framework has become one of the most referenced models in the world of competitive strategy and remains popular today, more than 40 years later.

The purpose of the five competitive forces is to provide a framework for analyzing the competitiveness of any industry structure. Often, organizations will only look at their direct competitors when analyzing competition, and fail to recognize or track other forces. Porter posits that solely focusing on competitors is too narrow a definition and that firms should look beyond their established rivals to other competitive forces. Porter’s five forces are:

Organizations should take steps to monitor each of these five forces and should reassess their strategic position in relation to changes in any of these areas for a more competitive advantage. Many consultants apply Porter’s model when assessing the competitive environment and positioning of companies. It is often used as a precursor for more advanced analysis. 

Of course, tracking each of these somewhat abstract forces is a complex task for organizations. Fortunately, advanced market and competitive intelligence (M/CI) platforms like Knowledge360Ⓡ now have the technology to help organizations better monitor and understand their external environments on a programmatic, automated basis. Alternatively, Trends and Intelligence as a Service solutions now exist that enable organizations to stay on top of market trends, technology, and competition in real-time.

Let’s explore each of the five competitive forces that shape strategy in more detail.

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Competitive Rivalry

The first competitive force refers to the level of competition within the industry. These days, almost every industry is fiercely competitive, from the pharmaceutical industry to the Consumer Packaged Goods (CPG) industry

For organizations to be successful, it’s imperative to have a strong understanding of existing competitors, and know how to best position themselves strategically in response. Only by continuously monitoring their entire set of known competitors--as well as looking out for new competitors--can organizations be successful. 

Effectively monitoring competitors requires an investment in M/CI leaders, systems, and infrastructure. To be truly successful, companies must embrace a culture of competitive intelligence at every level of the organization, and adopt innovative technologies that enable them to conduct cutting-edge competitive intelligence at scale.

The Threat of New Entrants 

Organizations in all industries are commonly disrupted by new entrants. This has been evidenced time and time again over the past few years. Consider the way Airbnb disrupted the hotel industry, or how Netflix has changed the entertainment industry. As technology continues to proliferate, the trend of disruption is not subsiding any time soon.

The threat of new entrants is broadly driven by the barriers to entry that are present in any industry. Barriers to entry are market forces that make it difficult for a startup or other new competitor to break into the industry. These barriers will differ by industry. For example, it’s relatively difficult for a new competitor to enter the pharmaceutical industry, because the capital requirements to do so are prohibitively high. 

CompetitionWhen barriers to entry are low, the threat of new entrants to the market is high. Organizations, particularly those in industries where the barriers to entry are low, can--and should--take active steps to monitor the development of new entrants into their markets. In this regard, platforms like Knowledge360 that use AI to surface related content are invaluable, helping M/CI professionals discover potential new entrants early in their development. 

The Threat of Substitutes

A substitute is another product that uses a different technology to solve the same need. It’s important to note that substitutes are not considered direct competitors. This is a frequent misconception. 

Let’s take the example of someone who wishes to travel between Cipher’s offices in Franklin, TN, to Annapolis, MD. Various airlines offer flights: they are direct competitors, not substitutes. In this instance, a substitute would be a car rental company, or another form of transportation, such as bus or train. Substitutes use different technology to satisfy the same economic needs.

Franklin to AnnapolisSeveral factors shape the threat of substitutes faced by any organization. One is buyer switching costs: how expensive it is-in time, money, or some other value-to change to a substitute product. If switching costs are high, the threat of substitutes is low. 

Another factor is the availability of substitutes: the range of options available to prospective buyers. It’s important to note that this can change in line with new innovations or regulatory changes, underscoring the importance of continuously monitoring the external environment. Again, the greater the availability of substitutes, the greater the threat.

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The Bargaining Power of Customers

The amount of leverage that customers have is different in every market, and is dictated by several factors. These factors determine the price that organizations can charge their customers for their products and services. 

Customers have high levels of bargaining power when they have many alternatives, or represent a significant portion of the organization’s revenue. Conversely, bargaining power is low when there are few alternatives, and this tends to drive prices higher. 

When customers have greater bargaining power, they are able to negotiate better and unlock lower prices. Organizations can take strategic steps to reduce the bargaining power of their customers, such as introducing a customer loyalty program that rewards repeat purchases. From a competitive strategy standpoint, it’s important to monitor the bargaining power of customers by keeping track of both the broader market and competitors.

The Bargaining Power of Suppliers

Much like customers, supplies are another element of the value chain that possess some level of bargaining power that can impact the strategic decision making process of an organization. If an organization has little choice in its suppliers, the supplier enjoys greater bargaining power and can unlock favorable concessions in pricing, payment terms, or other areas. 

Besides the availability of alternative suppliers, a range of other factors determine the bargaining power that suppliers have in any industry. The raw cost of materials is an input, as is the presence of worker unions that might drive higher labor costs. Many times, it can be difficult for an organization to switch to a new supplier due to long-standing dependencies, which also adds to the bargaining power suppliers might enjoy. 

All too often, organizations make strategic decisions solely through the lens of their customers and competitors and fail to assess the impact on their supplier base. Suppliers, particularly those with high bargaining power, can have a major impact on strategy. It’s important that they be considered as an input in the strategic decision making process. 

Analyzing the Five Competitive Forces for Your Business

Organizations of all sizes and industries should conduct a five forces analysis to shape their competitive strategy and decision making process. But conducting this type of analysis demands deep insight, an impartial viewpoint, and experience.

Many organizations choose to partner with competitive strategy consultants to apply this model. At Cipher, Porter’s Five Forces model forms a foundational aspect of our approach to strategy consultancy. By enabling firms to understand their competitive position, Cipher helps leaders to make decisions that create significant, lasting competitive advantages in the marketplace, driving value creation.

To learn more about competitive strategy, check out our Learning Center. If you’re interested in working with our competitive strategy consultants, schedule a call now

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