Porter's 5 Forces
Categories: Company Management
We heart Michael Porter. He's kind of the Steven Tyler of the MBA set (only with worse hair and probably fewer, um, trysts). He created the seminal work of business analysis that divided the challenges of business into 5 key categories: competition in the industry, potential of newb companies entering the industry, the power of suppliers, the power of customers, and the threat of substitute goods.
These 5 categories are things firms must think about. Survival mode. Just like you working at your job...you gotta keep an eye on the competition, consider whether you’re replaceable or indispensible, yada yada. Preaching to the choir here, hopefully.
Besides keeping firms alive against the competition, Porter’s Five Forces helps businesses expand. They can help a firm determine if its current product and service offerings are on solid ground, and provide new avenues for growth.
Perhaps you sell SEO (search engine optimization) marketing services, and determine there’s little enough competition and a high enough barrier to entry that adding PPC (pay per click) ad marketing to your spread of offerings is a good idea, thanks to Porter’s 5 Forces.
The threat of substitute goods is real. Remember when MP3 players were all the rage? That didn’t last long, as people’s phones became their everythings: phones, cameras, MP3 players, navigation systems, etc. Lots of MP3-related tech businesses went out of business; they weren’t watching Apple close enough. You can see for yourself how camera sales have been dropping ever since smartphones swept everyone off their feet.
What about suppliers? For instance, it might not be so smart to be getting into the oil biz right now. A major supplier of oil, OPEC, is a price-setting cartel. Plus, we’re running out of oil. Some people think we’ve already hit peak oil. It’s good to consider the supply, and the suppliers, of the goods you need before entering a new market.
And consumers? Firms are only as good as what consumers are willing to pay for. If consumers have a lot of bargaining power to drive prices down, then firms will have a tougher time. That’s why today’s economy has so many monopolistic competitors: firms that try to create their own segment of loyal consumers by differentiating their product a bit.
At the end of the day, the Porter boxes are all about power and rivalry and margins. Who wins? Who loses? Who survives? Why? Because life's a journey...not a destination.
