Porter's 5 factors

I recently read Michael Porter’s 1979 HBR article on Competitive forces. It serves a great reminder of all the factors that can affect the business, and that a strong business takes into account the relationship of all those factors.

 

In quick summary the 5 factor model encompasses threat of new entrants, bargaining power of customers, threat of substitute products or services, bargaining power of suppliers and the current state of the industry including competitors. A pull or push from any of these directions can throw the business out of alignment. In order to hedge against the uncertain future, the business needs to constantly monitor to their environment.

 

Ongoing success lies in understanding the current state and planning for the future. This can be done in any number of ways. As Porter points out this can be done by creating strong relationships with buyers, entering a new technology partnership and differentiating the product through marketing. However, these are just possibilities, any number of areas can be effective for increasing or sustaining market share. Each possibility means that the current and future landscape needs to be assessed and understood when formulating the specific strategy.

 

A failure to accurate assess the landscape in any of the factors can lead to a loss of business or position. In the current business climate with so many niche companies not taking the time to survey the competition in close fields can lead to a deterioration of the existing customer base. A lack of attention to suppliers and buyers can mean that costs creep up and profits erode, or that the product is not in line with current trends.

 

The interactions on a company are many and understanding each of these factors can lead to ongoing business success.