Porter's Five Forces 101
Last night marked the end of my 12-week relationship with economics, and I can't say it was hard to let go. We wrapped up the two-part microeconomics course by revisiting Michael Porter's Five Forces. As I've mentioned before, Porter and his forces are getting a lot of play in business school so far.
Since this is their third appearance in six classes, it got me thinking: How much play do these forces get in the real world?
According to Porter, these legendary five forces shape the profitability of an industry and determine how attractive said industry is. Analyzing the forces in relation to your industry can help you decide strategy for your organization.
As a quick review, here they are, Porter's Five Forces:
- Internal rivalry: Who are the existing competitors in the industry, and what's the level of competition?
- Entry: How hard is it for a new firm to enter the industry? What barriers exist to discourage new entry?
- Power of suppliers: Who supplies the industry's inputs, and how easy is it to negotiate with them?
- Power of buyers: On the other end, who's buying the industry's products, and how easy is it to negotiate with them?
- Substitutes: What products/services exist that take the place of the industry's products, and how does this affect industry demand?