Have you ever agonized on how, where and when you should make major strategic changes? Using the now proven 5 Forces Analysis can help to objectify tough strategic decisions and improve your competitive advantage.
In 1979 the tired and inadequate SWOT analysis went out the window when Harvard’s Michael Porter introduced his 5 Forces Analysis. It helps companies to realize improved profits, competitiveness and clearer strategy. It improves your understanding of both the strengths of your current competitive position and the strengths of a position you are considering moving into.
Understanding the 5 Forces
1. Competitive Rivalry: What is the number and capability of the significant competitors you must consider? Do you have a relatively equal products and services amongst competition or do you have distinct competitive advantages over the competition?
2. Supplier Power: How easy is it for suppliers to drive up prices? How unique are the products and services of your key inputs? How abundant or scarce are quality suppliers?
3. Buyer Power: How easy is it for buyers to drive prices down? How little does it cost a customer to switch to a competitor? Is there a large abundant market of buyers or a relatively tight small market?
4. Threat of Substitution: What is the likelihood and ease with which customers can find a different way to do what you do?
5. Threat of New Entry: What is the ability and ease with which new competitors can enter your market? Do you have strong or little protection around your key technologies? Are there high or low barriers of entry into your market?
Using the 5 Forces in Strategic Thinking
First consider the trends and shifts of the recent past in your industry. What have been the specific trends in each of the 5 Forces? Has competition become more and more intense? Have suppliers and buyers had increasing power? Has the threat of substitutes increased in the past? Have new competitors been entering your industry or have they been leaving?
Trends change. While the last 3, 5 or 10 years may have been shifting in one direction with any of the 5 Forces, currently what is the state of that Force? Analyze each area as to what you, your team and objective third parties believe to be the direction of each force currently.
Future Anticipated Trends
While a Force may be currently moving in one direction a change may be imminent. Consider what developments are likely and list them out. Include possible problems that could arise, as discussed in our Potential Problems Analysis article. While much of this is only a guess, this part of the analysis helps to prepare management for setting the right objectives that capitalize on current opportunities as well as objectives that prepare the organization for future potential opportunities.
After your analysis you can begin to prioritize actions for implementation around the objective of optimizing and protecting profitability. This is done by countering the power and thus profit draining impact within each Force. Within each force there may be many opportunities for your team to take action that may improve profitability. For example, to neutralize customer power you might expand services that raise the cost of switching. You could also consider alternative channels to the customer to neutralize the power of a channel. You could counter price-cutting competitors by investing in innovation and creating unique products. Your increase in R&D can also create a barrier to entry for new entrants.
Ultimately by using the 5 Forces Analysis you can begin leading your industry with profit improving innovation that also derives ever greater value for your customers and the market.
Since 1990 Mark Faust has run www.EchelonManagement.com a growth and turnaround consultancy, providing facilitators and speakers who’ve worked with clients from the c-level of the Fortune 500 as well as owners of multi-generational family owned companies. Mark can be reached at: Mark@EM1990.com or 513-621-8000 Bulk copies of Faust’s book, Growth or Bust: Proven Turnaround Strategies to Grow Your Business are available at a discount from Barnes & Noble at email@example.com or 513-791-5158 for orders of 2 or more.
If you are a CEO of an 8 or 9 figure company you can contact Mark Faust for a free copy. Mark’s growth tweets are @MarkFaustSr