Porter's 5 Forces - A strategic planning model

Revision as of 23:56, 18 March 2022

Abstract

The Porter's Five Forces Model is a strategic analysis tool often used by companies to understand the profitability and structural underlying drivers of projects and to develop competitive strategies. These five forces are supplier power, buyer power, competitive rivalry, the threat of substitution, the threat of new entry ^[1]. The goal of the model is to help identify the strengths and weaknesses of a project and then determine the structure and strategy ^[2]. In a certain sense, competitive strategy derives from a deep understanding of the project's competitive landscape. In any industry or project, whether it is producing products or providing services, the law of competition can be reflected through these five forces. For project managers and operators, it is easy to get confused in project operation because of unknown reasons. This is an effective tool to find what really makes the industry profitable. Analyzing exactly which trends will have a big impact on the project, where the constraints are, and if those constraints can be relaxed, it may allow the company to find a really strong competitive position.

The analysis of the five forces model requires a certain knowledge background, but it is relatively easy to practice and apply. This tool can be applied from small-scale projects to large-scale industries. For project management, it is an effective tool to develop a competitive strategy in the market.

This article will explore how to use Porter’s Five Forces model to find the fundamental factors of project profitability, analyze the practical application of the model, and discuss the limitations of the model with critical thinking.

Big idea

The Context: Strategic Planning

Generally, project management can be regarded as the process of achieving the objectives of the strategic plan. Strategic planning is the process of formulating and implementing policies for the future direction of an organization. A strategic plan is usually developed based on professional analysis and experience prior to the implementation of some activities and initiatives. It includes measures and systems to achieve the overall goal. Additionally, a line of sight must be created from strategy to tactics to operation for a successful strategic plan. The things that must be done during a strategic planning processing: 1. Research the current business state and environment 2. A vision of an ideal state for the next three to five years 3. Develop a planned path for how to get from one place to another

The Model: Porter’s Five Forces

Known as the father of the competitive strategy, Michael Porter is an active advocate for thorough research and analysis of the nature of competition. The concept of Porter's five forces first appeared in his 1979 paper. For more than two decades, Porter's Five Forces Model has been one of the business concepts familiar to corporate strategists. Porter wrote in Competitive Strategies published in 1980:

"In any industry, whether domestically or internationally, whether it is a product or a service, the rules of competition lie in five competitive forces. The collective power of these five competitive forces determines a company's profitability. The strength of these five forces will vary across industries and will continue to change as the industry evolves."

The model, as shown in figure1, consists of five force groups: the bargaining power of suppliers and buyers, the threat of potential entrants, the threat of substitutes, and competition among peers. This analysis method belongs to the micro-analysis in the external environment analysis method, which shows the profit space of the enterprise in the project. The model is a measure of the industry situation, not a measure of firm capabilities. Usually, this analysis method can also be used for entrepreneurial ability analysis to reveal the profitability of a project in the entire industry.

The model is an easy-to-understand framework that facilitates companies to participate in market competition. For strategists, these five forces act as leverage when executing any strategy that could affect the competitive position of the business.

Application

There are three basic steps in applying the Five Forces Model:

• Collection of information and data

Before applying these five forces for analysis, companies must gather as much information as possible about the industry. Like the example shown in Figure 2, finding what’s moving the industry?

• Analyze results with charts

After obtaining enough information, it is necessary to analyze and organize the information to identify the factors that affect the development of the industry. Because for different industries, the factors and problems affecting their development are different.

• Develop and articulate strategies based on results

Convert the result. From the analysis, several factors that affect the profitability of the industry are derived, and these are translated into improvement strategies that increase the benefit of the company.

The five forces model can not only be used before the project starts, but also for strategic analysis and maintenance in the middle and later stages of the project.

The Process: The Five Forces

Horizontal forces

References

[1] Grundy, T. (2006). Rethinking and reinventing Michael Porter's five forces model. Strategic Change, 15(5), 213–229. https://doi.org/10.1002/jsc.764

[2] THE INVESTOPEDIA TEAM. (2020, Feb 21). Porter's 5 Forces. From Investopedia: https://www.investopedia.com/terms/p/porter.asp