Aug 20 2020
Porter’s Five Forces is a tool used to analyze the competitive position of a business. Like the SWOT framework, the Five Forces model helps guide strategic decisions by looking at the threats and opportunities a company faces. While the Five Forces model examines internal conditions, a SWOT analysis looks at both inside and outside factors. The Five Forces framework can help decision makers understand the strengths and weaknesses an industry faces in order to better understand the viability of a new business or evaluate goals and strategies in established businesses.
Wondering which five forces we’re talking about? The Five Forces model focuses on key factors that affect the competitive environment and potential for profitability, which are paramount to businesses’ success. These key factors include threat from new entrants, buyer power, threat from substitutes, supplier power and competitive rivalry.
Below are four of the main reasons to use the Five Forces model:
1. When starting a new business
Entrepreneurs start new businesses for lots of reasons—maybe they want to become experts in their field, make their own work hours or follow a passion. Whatever the reason may be, all entrepreneurs must consider the financial side of business. While the backstory does matter, the road to profitability will be of utmost interest to lenders and investors. That’s where Porter’s Five Forces comes in handy. The Five Forces model helps you drill down to the key factors that influence profitability in your specific industry.
2. When gauging profit potential for established businesses
No matter how established your company is, setting, monitoring and meeting profit goals will always be a focal point of business. Using the Porter’s Five Forces framework can help you set attainable profit goals by looking at the threats and opportunities in your industry. The competitive landscape in your industry is subject to change, which is why Porter’s Five Forces should be applied periodically as a means of reviewing the state of competition. Without monitoring the level of competition in your industry, you run the risk of miscalculating your profit targets and missing warning signs that could threaten your business’s financial health.
3. When evaluating the effectiveness of a business strategy
Business strategies have the potential to drive revenue growth, expand market share, establish partnerships and more. To carry out competitive business strategies, businesses take risks and put resources on the line in hopes of achieving a desired outcome. To make sure your risks are worth the reward, it’s important to monitor progress. Using the Five Forces model during pivotal stages of your business strategy can help you evaluate the success of your plan and influence your decisions regarding next moves.
4. When assessing investment opportunities
Before greenlighting investment into stocks, real estate or other assets, decision makers need a clear picture of a firm’s competitive position in its industry. The Five Forces model helps investors pinpoint underlying threats and isolate factors that have a strong bearing on competitive resistance. When businesses rank highly in terms of competition, they can often adapt to changes more seamlessly and thus pose lower risk to investors.
If you’re approaching a pivotal stage in your business, it may be time to apply the Five Forces model. But where should you go for trustworthy information? Existing companies may publish annual reports or press releases that outline their performance. While these sources give you a small piece of the puzzle, looking at the wider industry provides an important comparison point. Unbiased third-party industry reports can help you understand where your business sits among the competition. Finding detailed reports that cater to the Five Forces model can help you conduct a Five Forces analysis without the hassle.