The Five Forces are a business assessment tool that can identify an industry’s strengths and weaknesses, and analyze the competitive forces at play in that same industry. Harvard Business School professor, Michael E. Porter, classified the Five Forces as:
Companies can use the Five Forces to understand their position in an industry, to assess what competitive forces can affect their position, and to inform a business strategy that advances their position in an industry. The benefits of the Five Forces framework are varied: assess how your corporate strategy stands up against competitors, understand how a particular industry maintains or enhances its profitability, evaluate the attractiveness of an industry, explore current or projected trends and how they shift your position in the marketplace, identify which industries show the most potential for success, and use your findings to guide a strategy that maximizes on this potential for success. The Five Forces is an effective tool because the profitability of every industry is determined by the same factors: industry structure along with a company’s competitive position in that industry, and this framework can help you to analyze both.
The Five Forces framework is presented in five sections: rivalry among existing competitors sits in the centre and the remaining four forces (bargaining power of buyers, threat of new entrants, bargaining power of suppliers, and threat of substitute products or services) are placed around it.
Get prepared. The Five Forces offer an external look at your competitive advantage, so you need to gather relevant information about your competitors and industry. This may include sales and performance data, the reasons for customer gain and loss, supplier information, current and forecasted industry trends, and what impacts your demographic’s buying decisions.
Consider these questions: What relevant data do we need to gather? What current or forecasted trends do we need to identify or investigate? What customer or demographic information is important?
Consider what resources (internal and external) you need to gather the data, what questions you need to ask, and which department’s input is most relevant.
Consider these questions: Whose input and what information do we need? What method(s) will we use to collect this input and information?
Use the relevant data, resources, and people to complete the Five Forces framework. Fill in the rivalry amongst existing competitors section last and use the information from the other completed four forces to guide this final section.
List the threat of substitute products or services and consider these questions:
Determine the bargaining power of buyers and consider these questions:
Establish the competitive rivalry among existing competitors in your industry and consider these questions:
Determine the bargaining power of suppliers and consider these questions:
List the threat of new industry entrants and consider these questions:
Refine the data collected and create a list for each of the five sections. Use the information to determine if the threat is high, medium, or low for each section.
Finally, use the Five Forces framework to highlight areas of your business that perform well and to identify red flags based on industry trends or threats. Consider what this data tells you about the direction of your industry, your market position, or any potential business opportunities. Apply the information to a strategic plan, as needed.
