Every company needs to move forwards, otherwise it risks being overtaken by its competitors, but what are the best strategies to use?
One simple but effective tool, developed by Michael E Porter in the 1980s, is known as Porter’s Five Forces, the subject of this blog.
Who is Michael E Porter?
Economist, researcher, author, advisor, speaker and teacher, Michael E Porter is the author of 19 books and more than 125 articles on management, competitiveness and business strategy. His research is used by corporations, academics, corporations and NGOs across the world.
As well as being the Bishop William Lawrence University Professor at Harvard Business School in the US, he heads up the school’s Institute for Strategy and Competitiveness, an organisation created in 2001 in order to further the work he does.
Writing in Fortune Magazine in 2012, Geoff Colvin said: “He has influenced more executives – and more nations – than any other business professor on earth.”
What are Porter’s Five Forces?
These are the five factors that affect the competitive position of a company:
- Potential entrants – companies that enter the market in competition with your business
- Substitutes – similar products that compete with yours
- Buyers & Customers – and their bargaining power
- Suppliers – and their bargaining power
- Industry competitors – the amount of competition from your existing competitors
Why should my company take notice of Porter’s Five Forces?
By looking at the wider competitive forces beyond a company’s internal set up and operation, Porter’s model aims to make it easier for a company to choose the best strategy to move forward with.
Not only can this help a company remain in business, it can also increase its profitability. By being aware of and dealing with outside threats, a company can shift the balance of power in its own favour.
Remaining competitive is important in any industry at any time, but it’s particularly essential when you are operating in a field with a lot of competition or when there is slow market growth.
What action should my company take?
The first step is to recognise these outside influences; the next is to analyse and act on them.
For example, if there is competition for a particular product or service, a company could look at developing something new that is not offered by other similar companies, focusing on a niche market within its field, or diversifying into new sectors.
If it’s difficult to obtain goods from a supplier, a company could look at ways of sourcing them elsewhere or manufacturing in house.
Being aware of Porter’s Five Forces and implementing change as a result can be a profitable strategy that helps a company to remain competitive. Changes can be actioned at departmental level or business wide.