Porter's Five Forces and Strategy Software

Harvard Business School professor Michael E. Porter developed the Five Forces model to help organizations analyze the competition in their industry. It names the factors that shape profitability, so a strategy team can see where pressure comes from and decide how to respond. This post explains each force, shows how to turn the analysis into goals, and describes how to track the forces over time in ClearPoint.

Understanding Porter's Five Forces

The model looks at five forces:

1. Industry rivalry: how hard existing firms compete. High rivalry usually means lower prices and lower profits.
2. Threat of new entrants: how easily new competitors can enter. High entry barriers keep new firms out and limit competition.
3. Bargaining power of suppliers: how far suppliers can dictate terms. Strong suppliers can charge more, which cuts into margins.
4. Bargaining power of buyers: how far customers can push prices and terms. Strong buyers force price cuts and lower profits.
5. Threat of substitutes: how likely customers are to find a different way to get what your business provides. The higher the threat, the more competitive pressure a company faces.

Take retail as an example. Amazon faces intense rivalry from firms like Walmart and Alibaba. The threat of new entrants is fairly low because entry costs are high and brands are established. Buyer power is high because shoppers have many alternatives, while supplier power varies and in many product categories Amazon holds the upper hand. The threat of substitutes is moderate, since brick-and-mortar stores offer a different shopping experience.

Using the Five Forces to set goals

The model gives a clear picture of industry structure, and that picture should feed strategic decisions. It can point to opportunities, such as an underserved market or a weak competitor. It can also flag threats you need to manage, such as strong buyer power or a high threat of substitution.

Be careful how you write the goals that come out of it. When we analyzed over 20,000 strategic plans, only 775 of 60,444 objectives, about 1.3%, used language related to competitive positioning, market share, rivals, or competitive benchmarking. The most competitively oriented objectives also had the lowest completion rates of any strategic orientation. That is not an argument against knowing your market. It is an argument against letting your market dictate your plan. Use the forces to understand the pressure, then write goals about what your own organization will do. Our post on whether competitors should shape your strategic plan has the full data.

Drugmakers are a good case. They often face high rivalry and a strong threat of substitutes from generic drugs. To answer those forces, a company might invest in R&D to develop patented drugs, or differentiate its products so substitutes are less attractive.

Banking shows the threat of new entrants at work. As fintech and technology companies became more involved in the banking space, Origin Bank recognized the importance of differentiating itself from competitors. Its first step was to recognize the bank’s core competencies, critical resources, and key success factors. The bank then broke its top goals into “Strategic Plan Blueprints” that let the board and executive management view the plan in terms of strategic positioning. Origin Bank also learned that sometimes the hardest part of strategy in a competitive industry is deciding what not to do, so the projects it selected could be done incredibly well.

Tracking the Five Forces in ClearPoint

The analysis is more useful as a working tool than a one-time exercise. In ClearPoint, an organization can build a scorecard with a measure for each force and track those measures over time. An airline, for example, might gauge the threat of new entrants by counting the new airlines entering its market. It could watch the threat of substitutes by tracking shifts in consumer preference toward other modes of transport.

Repeat the scan on a schedule. Our guide to using PESTEL to find external threats covers the wider scan, from the economy and politics to regulation.

ClearPoint's reporting features share what the measures show with stakeholders, so everyone agrees on the competitive picture and the response. The software also tracks the objectives and initiatives that respond to each force. If the threat of substitutes is high, R&D might focus on building features that set the product apart, while marketing promotes those features, with both working toward the same strategic objectives.

For a first pass at the analysis, you can use ClearPoint's AI Assistant. You describe your industry in plain language, it drafts the Five Forces analysis, and it can move the results into your ClearPoint account.

See how ClearPoint would run your plan — book a demo