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Porter's Five Forces. By: Harper, Gavin D. J., MSc, Salem Press Encyclopedia, 2019

Research Starters

Porter's Five Forces

The five forces analysis tool was developed by Harvard professor Michael Porter. The tool is commonly applied in the development of business strategy and is used as a method for understanding interfirm competition in various sectors. Porter was dissatisfied at other strategic analysis tools such as SWOT and PEST analyses and so developed the field of strategic theory by introducing this tool. The tool explains how three external and two internal forces combine to shape the intensity of competition, and hence attractiveness of any given marketplace. It tends to be used in application, as a preliminary qualitative assessment of the firm’s strategic positioning with a view to using more developed tools at later stages of analyses.

Overview

Michael Porter’s five forces tool traces its roots back to his first article published in Harvard Business Review, “How Competitive Forces Shape Strategy.” He established that the following five forces were important to consider when considering the position of a firm and its products and services in the marketplace: (1) threat of new entrants; (2) threat of substitute products/services; (3) bargaining power of suppliers; (4) bargaining power of customers; (5) the industry. These forces are commonly depicted in a diagram with forces one through four pointing into force five.

The five forces can further be considered in terms of vertical forces, i.e., the bargaining power of suppliers and customers, and horizontal forces, i.e., the threat of new entrants, substitute products, and industry rivals jockeying for position. Significantly, in addition to considering the strategic positioning relative to one’s present industry competitors, the model looks to future products and services, and new providers of products and services that may enter the industry and compete with existing offerings.

Some companies engage in more than one industry or marketplace. The five forces analysis is only appropriate for the analysis of an individual line of business, so when a business is engaged in multiple ventures in different industries, a five forces analysis should be done for each. A significant change to any of the five forces should serve as an opportunity to pause and consider the business’s strategy within that marketplace.

Adam Brandenburger and Barry Nalebuff made an important contribution to the model by adding what has commonly been deemed the sixth force, that of complementors. A complementor is a business that complements the product or service of another business and adds value to their mutual customers. An example would be a company that produces apps that come preloaded on another company’s cell phone.

The five forces model has been criticized by some academics. Kevin Coyne and Somu Subramaniam asserted that the model assumes that there is no relationship or collusion between those companies that may be competing with the firm, supplying the firm, or buying from the firm. Furthermore, they contend that marketplaces are uncertain places, and there is not always the opportunity to plan strategically and respond to the strategic advances of others.

Bibliography

Brandenburger, Adam M., and Nalebuff, Barry. Co-opetition: A Revolution Mindset That Combines Competition and Cooperation: The Game Theory Strategy That’s Changing the Game of Business. New York: Currency, 1997. Print.

Coyne, Kevin P., and Somu Subramaniam. “Bringing Discipline to Strategy.” McKinsey Quarterly 4 (1996): 14–25. Print.

Duggan, William, Creative Strategy: A Guide for Innovation. New York: Columbia Business School, 2012. Print.

Fleisher, Craig S., and Babette E. Bensoussan. Business and Competitive Analysis: Effective Application of New and Classic Methods. 2nd ed. Upper Saddle River: Pearson, 2015. Print.

Grundy, Tony. “Rethinking and Reinventing Michael Porter’s Five Forces Model.” Strategic Change 15.5 (2006): 213–29. Print.

Hunter, Paul. The Seven Inconvenient Truths of Business Strategy. Burlington: Gower, 2014. Print.

Magretta, Joan. Understanding Michael Porter: The Essential Guide to Competition and Strategy, Cambridge: Harvard Business Review P, 2011. Print.

Parnell, John A. Strategic Management: Theory and Practice, Thousand Oaks: Sage, 2013, 32–42. Print.

Porter, Michael E. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press, 1998. Print.

Porter, Michael E. “How Competitive Forces Shape Strategy.” Harvard Business Review Mar./Apr. 1979. Print.

Porter, Michael E., Joan Magretta, and Mark R. Kramer. Strategy and Competition: The Porter Collection. Cambridge: Harvard Business Review P, 2014. Print.

Porter, Michael E., Nicholas Argyres, and Anita M. McGahan. “An Interview with Michael Porter.” Academy of Management Executive 16.2 (2002): 43–52. Print.

Copyright of Salem Press Encyclopedia is the property of Salem Press. The copyright in an individual article may be maintained by the author in certain cases. Content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. Source: Salem Press Encyclopedia, 2019, 1p Item: 89550628

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