These five forces are empirically derived, e.g. by observation of real companies in real markets, rather than the result of economic analysis. Porter’s five forces is a useful generic structure for thinking about the nature of industries. The understanding of the structure of an industry is the basis for formulation of competitive strategy. The work of Porter provides an analytical framework for the analysis of the structural factors that condition competition within an industry and suggests several generic competitive strategies. An industry is not a closed system, competitors exit and enter, and suppliers and buyers have a major effect on the prospects and profitability of the industry.
However, Porter points out that the structure of an industry will not change in the short term. Industry structure is something that irrespective of the general economic climate or short term fluctuations in demand fundamentally affects return on investment. Structural change is slow and often associated with political and labour conflict. Structural factors are often cited as holding back development and in some cases governments make funds available to mitigate social problems caused by structural change.
By understanding this Porter’s five forces framework that used to analyse industry’s competitive forces and to shape organization’s strategy, we can apply it in our company by developing the following steps below:
1.Gather the information on each of the five forces
In this step, managers / strategists should gather information about their industry and to check it against each of the factors influencing the force.
2.Analyze the results and display them on a diagram / matrix In this step, managers / strategists should analyze the gathered information and determine how each force is affecting an industry. For example, if there are many companies of equal size operating in the slow growth industry, it means that rivalry between existing companies is strong. The thing that must be remembered is five forces affect different industries differently, so don’t use the same results of analysis for even similar industries.
3.Formulate strategies based on the conclusions
At this step, managers / strategists should formulate firm’s strategies using the results of the analysis. For example, if it is hard to achieve economies of scale in the market, the company should pursue cost leadership strategy. Product development strategy should be used if the current market growth is slow and the market is saturated.
In the end, even though Five Forces is a great tool to analyze industry’s structure and use the results to formulate firm’s strategy, it has its limitations and requires further analysis to be completed such as SWOT, PEST, or Value Chain analysis.