Business

Strategy: 5 Forces of Porter

Reading 6 min Article Advanced

Vocabulary - Business Strategy

Grammar - Interrogative Pronouns

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Tap all the highlighted words in the text below to see their definition. ⇩

The Five Forces of Porter is a very empowering framework to analyze a company’s competitive environment and understand its potential profitability.

Michael Eugene Porter (born in 1943) is an American Academic and professor at Harvard Business School. He published the 5 Forces Framework for the very first time in the Harvard Business Review in 1979.

Porter enhances the fact that organizations should watch beyond the actions of their direct competitors and examine what other factors could impact their business. He identified five forces that make up the competitive environment. Depending on your company’s situation when facing the five forces, you will have an entry barrier that sets you apart from your competitors.

1. Industry Rivalry: This looks at the number and strength of your competitors. How many rivals do you have? Who are they? How is the quality of their products or services? If rivalry is intense, companies make aggressive price cuts. If competitive rivalry is minimal, your focus will be on profits and service quality.

2. Power of Suppliers: How easy is it for your suppliers to increase their prices or set the general conditions? How many potential suppliers do you have? How unique is the product they produce for you? And, how expensive would it be for you to switch to another supplier?

3. Power of Buyers: How easy is it for buyers to drive your prices down? How many buyers are there and how much control do they have over you? How hard would it be for them to switch to another company?

4. Threat of Substitutes: How likely is it for your clients to find different ways of doing what you do for them? For example, using a phone instead of a computer.

If you don’t cannibalize yourself, someone else will.

Steve Jobs

5. Threat of New Entrants: How easy could it be for new competitors to come into your market and take it from you? How much would that cost them? How tightly is your sector regulated?

I hope this lesson has provided you with some new business vocabulary and expressions, while opening the door to a new strategy framework that you might use.

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