The Five Forces Analysis explained

the five forces analysis michael porter of harvard business school developed the five forces model as a tool to analyze the competitive environment in industries he argued that some industries are consistently more profitable than others and that by analyzing the competitive environment you can see which industries are attractive for companies to compete in for example he found that airlines tend to be unprofitable whereas soft drink companies are highly profitable and the five forces model can be used to explain why this is the case the framework considers five factors that drive competition in an industry let's discuss each one in turn and illustrate with an analysis of the coffee shop industry in a typical city the first force is the level of rivalry having lots of strong competitors in an industry who are all fighting for customers will make life difficult many cities now have lots of coffee shops making the level of rivalry high this by itself makes the industry not very attractive in the five forces model it is recognized that you are not only competing for profit with your direct rivals but also with customers suppliers substitutes and potential entrants if customers tend to be large and they can easily switch between suppliers they are in a strong position to negotiate lower prices which will limit industry profitability in the coffee shop industry customers tend to be individuals who cannot negotiate the price of the product however the fact that they can easily switch from one supplier to another as well as their ability to leave reviews on social media increases their power similarly if suppliers are strong and offer unique products that companies in the industry cannot go without the industry will be less attractive for coffee shops suppliers of coffee beans milk and sugar are not powerful since there is a lot of choice and switching from one supplier to another is easy the fourth force in the model is the power of substitutes coffee shops don't only compete against each other but also against products in other industries that satisfy a similar need for example if you do not get your drink from a coffee shop you might make it at home or get it from a machine if these products are seen as good substitutes for coffee shops then this limits profitability in the industry in reality many people see coffee shops as a place to meet friends or take a short break out of the house and there are not many good alternatives that meet these needs finally the threat of new entrants can make an industry less attractive entry barriers in the coffee shop industry are low and it is quite easy to enter the business this means that a coffee shop owner does not only compete against existing rivals but also against other potential competitors who may enter the industry at any time other industries such as car manufacturing are more difficult to enter and companies know they will not suddenly face lots of new competitors by considering each of the five forces and then looking at the total picture it is possible to make conclusions about how attractive an industry is carrying out a five forces analysis also helps to identify the barriers to profitability in an industry and enables companies to design strategies that deal with these barriers for example if customers find it easy to switch between different coffee shops then a company can introduce loyalty cards to encourage customers to keep coming back similarly if the level of rivalry is strong companies can try to differentiate in order to provide unique value to customers and make the competition less of a threat if you do a five forces analysis the best is to take a step-by-step approach as follows one define the industry that you are analyzing two for each force identify the current situation who are the most important competitors customers and suppliers what are the substitutes and entry barriers three analyze the attractiveness of the industry for each of the five forces for each force are there factors that make the industry easy or difficult for companies finally look at the overall picture and consider what your analysis as a whole says about the attractiveness of the industry and about how to successfully compete in it remember that even if your analysis shows that an industry looks unattractive it is still possible to be profitable with an innovative and original strategy there are lots of examples of successful companies in difficult industries that concludes the five forces analysis check our other videos for more insights brought to you by sim institute

Channel: Sim Institute

Views: 64,057

Keywords: Five Forces Analysis, Michael Porter, Buyer power, supplier power, industry competition, industry attractiveness, threat of substitutes, entry barriers, business strategy, Harvard Business School, Business strategy, corporate strategy

Id: ehSQR6oMBHA

Length: 5min 4sec (304 seconds)

Published: Sun Nov 15 2020