How to Use Porter's Five Forces

Another tool that can be used while building your analysis is Porter’s Five Forces. The idea behind Porter’s Five Forces is to analyse the industry position of your client. As we discuss these tools, remember that you won’t use all of them in every situation, and your choice will depend on the time available to resolve a case.

When we talk about Porter’s Five Forces, we identify five key components: buyer power, supplier power, the threat of substitutes, competitive rivalry, and the threat of new entrants. Let’s discuss each of these forces in more detail.

At the centre is the rivalry among competitors. Consider factors such as the number and diversity of competitors within the industry, the industry’s concentration, growth, and barriers to exit. Also, think about brand loyalty and how switching costs impact the industry.

Moving to buyer power, examine the number of customers and the size of their orders. Consider how price sensitivity affects buyers, their ability to substitute products, and how much information they have. Additionally, assess the costs for buyers to switch to other products.

For supplier power, reflect on the number of suppliers and their size, as well as the uniqueness of each supplier’s product. Consider the company’s ability to substitute a supplier’s product with another.

Next, evaluate the threat of substitutes. Analyse the number of substitute products available, the buyer's willingness to switch, and the relative price-performance of these substitutes. Product differentiation often comes down to quality or value for the price, so look at the switching costs for buyers and the company when considering substitutes.

Finally, assess the threat of new entrants. Think about barriers to entry like economies of scale, brand loyalty, capital requirements, and the cumulative experience needed by new entrants. Also, consider government policies and regulations that impact entry into the industry, access to distribution channels, and the ability of buyers to switch suppliers when new entrants emerge.

Breaking these components down individually can provide valuable insights and context, helping you formulate a well-rounded solution.