Sometimes a sixth force is added to the competitive forces Porter conceptualized. The model is called Porter’s Six Forces. The sixth force of competition is:
6. Complementors
[box]As you’re evaluating your competition using Porter’s five forces of competition, don’t skip evaluating all external factors that can impact and potentially destroy your company. Download the External Analysis whitepaper to learn how to start.[/box]
Porter’s Five Forces Example
Analyzing Porter’s five forces example does not always yield a simple or straightforward evaluation of the attractiveness and profitability of an industry. Some of the forces may be strong, increasing competition and decreasing profit potential, while other forces may be weak, decreasing competition and increasing profit potential. The results may be conflicting and the interpretation depends on the particular business and the particular industry. However, for the sake of simplicity, there is an overall attractive industry structure and an overall unattractive industry structure. Porter’s five forces model is merely a framework.
According to Michael Porter’s five competitive forces industry analysis, an attractive industry has the following characteristics. The threat of new entrants is low. The bargaining power of suppliers is weak. Then the bargaining power of buyers is weak. The threat of substitute products is low. Finally, the intensity of rivalry among industry competitors is low. Complementary products or services are unavailable. If Porter’s forces of competition are as described above, then the industry is attractive and there is profit potential.
According to Porter’s 5 forces of competition, an unattractive industry has the following characteristics. The threat of new entrants is high. Then the bargaining power of suppliers is strong. The bargaining power of buyers is strong. The threat of substitute products is high. Finally, the intensity of rivalry among industry competitors is high. Complementary products or services are unavailable. If the forces of competition are as described above, then the industry is unattractive and there is limited profit potential.
Porter’s Analysis – Attractive Industry
The following indicates an attractive industry:
- Threat of entrants is low
- Threat of substitute products is low
- Bargaining power of buyers is low/weak
- Bargaining power of suppliers is low/weak
- Intensity of rivalry among existing firms is low
Porter’s Analysis – Unattractive Industry
The following indicates an unattractive industry:
- Threat of entrants is high
- Threat of substitute products is high
- Bargaining power of buyers is high/strong
- Bargaining power of suppliers is high/strong
- Intensity of rivalry among existing firms is high
Porter’s 5 Forces Strengths
The 5 forces of competition is a strong tool for conducting an in-depth analysis of the competitive structure of an industry. Furthermore, Porter’s 5 forces model can be used to complement a SWOT analysis. In addition, the 5 forces framework is useful in strategic planning and can help a company determine whether or not to enter an industry or market by evaluating the potential for profitability.
Porter’s 5 Forces Weaknesses
Porter’s 5 forces of competition have a few weaknesses and limitations. First, the model underestimates the influence of a company’s core competencies on its ability to achieve profit. It, instead, assumes the industry structure is the sole determining factor. Then Porter’s 5 forces definition is difficult to apply to large multinational corporations with synergies and interdependencies achieved from a portfolio of businesses. Additionally, the five forces framework assumes there is no collusion in the industry. Finally, Porter’s analysis doesn’t consider the possibility of creating a new market.
As you use Porter’s five forces of competition to shape profit potential, it’s important to expand analysis by evaluating the entire external environment. Download the free External Analysis whitepaper to overcome obstacles and be prepared to react to external forces..
[box]Strategic CFO Lab Member Extra
Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]
ARTICLES YOU MIGHT LIKE
June 9, 2022 Hiring the right accountant When I meet a business owner operating at a successful $10 million in revenue, they often mention, “My CPA”… I immediately know that CEO/Entrepreneur is referring to their Tax CPA. That is because one thing that all Entrepreneurs have in common is that they must file a tax return. So, fromThe Struggles of Private Company Accounting
CPA’s are Specialized
June 8, 2021
The Difference in CPAs Looking back at my career I don’t know how many times I have introduced myself to someone and they ask, “Are you a CPA?” and I say yes. Then they tell me “you must be very busy with tax season” and I look at them with a bit of awe and
Read More »How to Improve Your Resume
August 10, 2020
The concept of resumes might seem difficult to grasp at times. After all, you’re set with the task of conveying all of your life’s accomplishments and skills in a single sheet of paper. Creating a good resume is an essential skill necessary to be successful in the workforce. A good resume can be the difference