Michael Porter from Harvard Business School created this framework in 1979. This framework is typically used during the initial phase of a marketing strategy planning/feasibility study to access the industrial-related markets for their attractiveness, level of competition, feasibility and have a sense of the competitive dynamic environment that dictates the market. These 5 forces will form the foundation of marketing knowledge which will shape marketing strategies.
Analysis
The essence of the 5 forces are listed below:
-Competitive rivalry within an industry/market:
Company can acquire the intimate knowledge of their direct competitors through profiling, in-depth analysis, monitoring, allows for measuring market potential, market share and cost-related pricing decisions to ultimately manipulate their marketing mix (4P) to gain competitive advantage over them.
- Threat of Potential Entrants:
Allows company to understand the level of barriers of entry to the market. This can lead to better understanding of the characteristics of the products, managing the me-too products that threatens the company's offerings. The most ideal market is one that is high in entry barriers for new entrants, and low in exit barrier for the companies in the market. This knowledge will aid in the strategic direction of the companies. They might even be influential in the market enough to alter the level of barriers and exits.
-Threat of Substitutes:
There are 2 forms of substitute: direct and indirect substitutes. Direct substitutes are those that offers similar features and benefits to the target market. Examples are me-too products (china made Ipod lookalike vs Apple Ipod) or Ipad vs Galaxy Tab. Indirect substitutes are those that offers similar features that are not specifically targeting your target market. Examples include Starbucks coffee vs instant packaged coffee.
Understanding this concept will also allow you to know the switching cost and propensity to switch to substitutes. You can also manipulate marketing mix to gain competitive advantages.
-Bargaining power of Suppliers:
To understand the power of supplier in the negotiation process so as to device strategies and tactics to leverage on the power and gain favorable positions in the relationship.
-Bargaining power of Buyers:
To understand the power of buyers in the negotiation process so as to device strategies and tactics to leverage on the power and gain favorable positions in the relationship.
Analysis and understanding of the Porter's 5 forces will allow companies to understand the industries's financial attractiveness, as well as feasibility (in the initial phase). With this in mind, companies can then focus on the marketing mix (4P) to tailor make a strategy to conduct business in the market. Do note, however that the business environment is dynamic and that the competitive forces are evolving constantly. Due monitoring and analysis is required to make this framework tick for the company.
Recommended articles/links
A video of an interview with Micheal Porter himself and a write-up on Porter's 5 competitive forces conducted by Harvard Business Review (HBR) can be viewed here.
