The Five Competitive Forces that Shape Strategy
When you're starting a business, it's not always the easiest task to get a handle on the big picture. In The Business Plan Workbook, the authors draw on the research of Professor Michael Porter of Harvard University. Watch a clip of Porter explaining his theory of the five forces that shape competitive strategy.
The authors of The Business Plan Workbook feel that the most usable way to get a handle on the big picture was devised by Michael E. Porter, who trained as an economist at Princeton and took further degrees at Harvard, where he is now a professor.
Professor Michael Porter determined that two factors above all influenced a business’s chances of making superior profits. Firstly there was the attractiveness or otherwise of the industry in which it primarily operated. Secondly, and in terms of an organization’s sphere of influence, more importantly, was how the business positioned itself within that industry.
In this video, Professor Porter talks about the five forces that drive competition in an industry and need to be understood as part of the process of choosing which strategy to pursue.
Threat of substitution: Can customers buy something else instead of your product? For example, Apple, and to a lesser extent Sony, have laptop computers distinctive enough to make substitution difficult. Dell, on the other hand, faces intense competition from dozens of other suppliers, with dozens of other products competing mostly on price alone.
Threat of new entrants: If it is easy to enter your market, start-up costs are low and there are no barriers to entry- such as IP (intellectual property) protection- then the threat is high.
Supplier power: The fewer the suppliers, the more powerful they are. Oil is a classic example where fewer than a dozen countries supply the whole market and consequently can set prices.
Buyer power: In the food market, for example, with just a few powerful supermarket buyers being supplied by thousands of much smaller businesses, the supermarkets are often able to dictate terms.
Industry competition: The number and capability of competitors are one determinant of a business’s power. Few competitors with relatively less attractive products or services lower the intensity of rivalry in a sector.
For more information on how a business can use this knowledge to inform which strategy they choose, pick up a copy of The Business Plan Workbook, new edition published January 2015. You can order with a 25% discount by entering the code BJW15 at checkout.