In this article, we offer you a free PowerPoint template of the Five Forces Model. The Five Forces Model is a framework developed by Michael Porter to analyze an organization’s competitive position. The objective of the framework is to determine the ‘attractiveness’ of a market, and indirectly its profitability. The Five Forces Model is a strategic tool for competition analysis, looking at the environment from five different angles. This article gives you a comprehensive introduction of the Five Forces Model as well as the steps you could take to use this fantastic framework and apply it to your own business.
According to Harvard Business School professor Michael Porter, there are five ‘forces’ that shape each market:
Porter’s Five Forces Model: Overview
The infographic below shows an overview of the Five Forces Model for competition analysis.
Let’s dive into each of the Five Forces in more detail.
1. Existing Competition
Internal competition highly influences an organization’s position in a market. The number and strength of competitors is the most important factor in determining market attractiveness. A market with a low number of competitors is not necessarily an attractive market. This could be the case when one competitor has a monopoly and a high level of customer loyalty.
When competition in a market is weak, a company has more power to charge higher prices for its products/services.
Existing competition can be classified into direct and indirect competition:
- Direct competitors are competitors offering the same (almost identical) products / services as you, focused on the same target group.
- Indirect competitors are competitors who target the same group, but with a different product/service. For example, an ice cream stand and a waffle stand. Indirect competitors are also known as substitutes, which is one of Porter’s five forces. We will dive into substitutes later in this article.
In short, the following factors may influence the threat of existing competition:
- The number and size of the competition;
- Competitor prices;
- The target group of competitors;
- Marketing power of competitors;
- Product differentiation (how much your products differ from your competitor’s products);
- Switching costs;
2. The Bargaining Power of Buyers
Buyers may have much or little power on prices. This depends on the number of buyers, but also on the possible alternative suppliers that a buyer could turn to. Another important factor is the size of the buyer relative to a company. If there is one buyer that buys 90% of a company’s products, this company is highly dependent on the buyer. The buyer could be considered powerful. You have probably heard of the term “Buyer’s market”: a market in which supply is higher than demand. This gives buyers a strong position in negotiations.
Examples of factors that impact the bargaining power of buyers are:
- the number and size of buyers;
- the alternatives suppliers that buyers could turn to;
- Switching costs (the costs of changing to another brand or product)
3. The Bargaining Power of Suppliers
Like buyers, supplier may also have a large influence in a market. A seller’s market is a market in which the demand for a product is higher than its supply. This gives a great deal of bargaining power to suppliers.
There are several factors that influence the power of suppliers. Take, for example, the size of a supplier. If a company is the most important and biggest customer of a supplier, this company will have a great power position towards its supplier.
Examples of factors that influence the bargaining power of suppliers are:
- The number and size of suppliers;
- The alternatives that buyers could turn to;
- Switching costs to a different supplier.
As you can see, the factors that determine the power of buyers are similar to the factors that give power to buyers.
4. The Availability of Substitutes
Related to the bargaining power of buyers is the availability of substitutes. When many substitutes are available, customers (buyers) might change to a substitute when they see a better or cheaper alternative. Substitutes essentially are a form of indirect competition: competitors who target the same group, but with a different product/service. A simple example of the availability of substitutes are the possibilities in public transport. A substitute of taking the bus would be to take a taxi. If bus prices suddenly rise by a large amount, the substitute of taking a taxi instantly becomes more attractive.
To determine the threat related to the availability of substitutes, you could look at:
- The quality of substitute products or services;
- The price of substitute products or services;
- Potential switching costs from Product A to a substitute product (for example, switching from public transport to driving a car involves high switching costs. Suddenly you’d need to invest in a car);
- Psychological factors
5. Potential New Entrants into the Market
While the factor we first mentioned focuses on the already existing competition, the potential new entrants concerns how easy it is for new competitors to become active in a market. When a market is highly profitable, it attracts interest from other companies to get their share of the pie. The higher the chance of potential new entrants into the market, the less attractive this market is to be. The reason for this is that potential new entrants form a threat to take a piece of market share, and by doing that, decrease the profitability of companies already active in the market.
How easy it is to enter a new market, depends on the level of entry barriers. There may be barriers to entry that make it difficult for companies to enter a market. Examples of entry barriers are the following:
- Capital requirements (this requires an initial investment that could be a barrier);
- Regulations that make it more complex to enter a market
- Licenses that must be granted
- Loyalty of customers to their current brand.
- Switching costs for buyers
How to use Porter’s Five Forces Model?
The Five Forces model is an excellent framework that can help you analyze the competition of your own small (or large) business in a structured way. It can be used either to analyze a potential new market, or to analyze the attractiveness how a market you are already in.
You could use the Five Forces Framework by following the steps described below:
- Take some time to brainstorm each of the five forces. See what you and/or some of your colleagues can come up with. This should already give you an idea of the five forces.
- After finishing your brainstorm, it is time to do some research. For each of the five forces, thoroughly research the market in more detail. There is many information out there online that should give you a more founded analysis of competition, suppliers, buyers, substitutes and potential new entrants.
- Based on the analysis, you should write down which of the forces are the biggest threat to your (new or existing) business and which ones you won’t have to worry too much about. Opportunities may also have emerged out of your analysis.
- Now that your five forces analysis is finished, you’re not done. Based on the analysis, you should define actions. Ask yourself the following questions:
- How can I deal with the threat of competitors?
- Is there a way to decrease the bargaining power of suppliers?
- How can I decrease the bargaining power op buyers?
- Is there a possibility to make my products/services more attractive than its substitutes?
- How will I respond when new competitors enter the market?
Five Forces Model Template (PowerPoint)
Now that we’ve looked at the Five Forces Model it is time you do it yourself. If you want to use the Five Forces Model for your own business, employer or for a school project, I placed a download link here to a simple free Five Forces Model template in PowerPoint (.ppt). With the template, you can create your own competitive analysis using the Five Forces Model!
Do you want to read more about strategic tools such as the Five Forces Model? Check out out posts on other strategy tools here.
If you’re interested in strategic analysis of companies & industries here, have a look at our strategic analyses here.