The 5 Forces That Shape Strategy

The Five Forces that shape strategy

In this essay, Michael E. Porter mentions and explains these five “factors” (as he describes them) that “define an industry’s structure and shape the nature of competitive interaction within an industry.”

Even though industries may look different from the surface; in the core, all industries work in a similar way. Therefore, these factors can be applied to study and make strategies around any desired industry, in order to understand it, and get the maximum possible profit from it.

These forces have varying power depending on the industry they are affecting. If the forces are strong (such as in the airlines industry), almost no company earns attractive returns in investment. On the other side, if the industries are more benign (such as in the software industry), many companies are profitable.

In the diagram, the central force is the Rivalry Among Existing Companies. This is because many strategists wrongly think that it is the only force that matters. Of course it is very important, but the others are, too. The importance of each individual force depends on the industry that you are talking about.

The second force to be explained is the Threat of New Entrants. As its name suggests, the desire of new companies to enter your market is a threat. It is bad, for you and your competitors, too. More companies offering your product or service will raise the offer and lower the demand, and will result in a forced price drop.

Fortunately, the companies that are already in the market have some advantages, called “barriers to entry”. These barriers “help” incumbent companies to stay competitive and victorious against possible new entrants. Some examples of these barriers are lower raw material costs, network effects (people tend to prefer to use a product or service that a lot of others use), the government, and customer switching cost (where switch means change from your product to another).

The third force is The Power of suppliers, where suppliers are the companies that give you the materials that let you create and sell a product or service. If these companies raise their prices, you can pay them more money, or change your supplier which, at times, is more expensive.

The fourth force is The power of buyers. Buyers are the people that let you get profit. They acquire your product or service in exchange of money. They can demand a better or cheaper service whenever they want, and you need to improve, or they will change their “supplier”. It has almost no cost to change supplier for the buyers, therefore the companies need to hear them, and grant them whatever they want. No buyers, no business.

Last but not least, is the Threat of substitutes. Substitutes are different or cheaper ways that have the same effect as your product. For example, with the birth

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