Strategic Planning with the Porter's Five Forces Framework

Porter's Five Forces is a technique that enables better strategic planning in business.

The Five Forces have become the defacto standard in analyzing a company's strategic position and its ability to generate profits.

Applications: market opportunity assessment, competitive analysis, and industry blueprint

Benefits: A comprehensive framework that leads to deep understanding of an industry and qualitative trends.

Porter's five forces include three forces from 'horizontal' competition: threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers, bargaining power of customers.

• Bargaining power of buyers is more important in the following situations:
  Purchases represent a large percent of buyer^Òs cost
  • undifferentiated product purchases
  • Minimal switching costs
  • Buyer has low profit margins
  • Buyer has full information
  
  
  
• Threat of substitution is more important in the following situations:
  • Many products can perform the same function
  • There are lower-cost alternatives
  
  
  
• Bargainging power of suppliers is more important in the following situations:
  • Dominated by a few companies
  • No substitutes
  • Industry is not an important customer of the supplier group
  • Supplier's product is an important input to the buyer's business
  • High switching costs
  • Threat of forward integration
  
  
  
• Barriers to Entry occurs in the following situations:
  • There are economies of scale
  • Product differentiation
  • Capital requirements
  • Switching costs
  • Proprietary technology
  • Favorable access to materials or locations
  • Government subsidies

According to Porter, the five forces model should be used at the industry level; it is not designed to be used at the industry group or industry sector level. An industry is defined at a lower, more basic level: a market in which similar or closely related products and/or services are sold to buyers. Firms that compete in a single industry should develop, at a minimum, one five forces analysis for its industry. Porter makes clear that for diversified companies, the first fundamental issue in corporate strategy is the selection of industries (lines of business) in which the company should compete; and each line of business should develop its own, industry-specific, five forces analysis.

Other Strategic Planning Frameworks

4P's Marketing Mix - Seven S (7S) Management Framework - AIDA - Attention, Interest, Desire, Action - Buying Process - Ansoff's Matrix - Product-Market Growth Matrix - Expansion Strategy - BCG Growth-Share Matrix - Bass Diffusion Model - Product Adoption and Innovation - Blue Ocean Strategy - Choice Model for Decision-Making Behavior - Competitive Advantage - Core Competence - Collective Learning in the Organization - Cost-Benefit Analysis - Delta Model - ERG (Existence, Relatedness, Growth) Theory of Motivation - Experience Curve - Framing Effect on Psychology and Marketing - GE (McKinsey) Matrix - Growth Phases - Predicting Industry Evolution and Change - OODA Loop - Observe, Orient, Decide, Act - PDCA (Plan, Do, Check, Act) - The Deming Cycle - PEST Analysis - Political, Economical, Social, Technological, Environmental, and Legal Factors - Perceptual Mapping - Brand Marketing - Porter's Five Forces - Product and Marketing Positioning - Product Lifecycle (Industry Lifecycle) - Root Cause Analysis - SWOT Analysis - Strengths, Weaknesses, Opportunties, Threats - Technology Adoption Curve - Value Chain -