Michael Porter - the 5 forces model

Organisations don't operate in a vacuum and so it is important that when organisations engage in strategic planning or thinking they take a good honest look at the industry(s) in which they operate.

Michael Porter outlined a technique for industry analysis in his 1985 book 'Competitive Advantage' which was developed into the (hopefully) very familiar model - Porters 5 forces.  Whilst not the only or exclusive tool that can be used, it provides a nice and simple way to look at the prospects of profitability in an industry and can be done over dinner on the back of an envelope (in true entrepreneurial style).

Porter’s 5 forces model is a tool for analysing an industry or market to gain an indication of the likely future profitability.  If you are operating in an unprofitable industry, no matter how strategically well positioned you are, it will be difficult to deliver consistent bottom line profitability.

The model looks at five critical areas in a market and assesses the relative strength of those areas:
1.     Threat of new entrants – how easily can a new organisation enter the market?
2.     Rivalry of existing competitors – how strong is competition for market share?
3.     Pressure from substitutes – how many viable substitutes are available?
4.     Bargaining power of buyers – how much leverage does the buyer have to affect the price?
5.     Bargaining power of suppliers – how much leverage do suppliers have on the market? 

The following model displays Porter’s model and the strengths in relation to the petrol industry (in New Zealand).

A quick look at the forces reveals that apart from oil suppliers there are few strong pressures that are likely to impact on the profitability of the industry.  As price increases can be simply passed on via petrol pump price increases then this should be (and is) a very profitable industry to be involved with.

No tool is accurate in all situations and we would be foolish to expect that given the complexity of the business environment.  Porters 5 forces though is a simple and effective way to get a feeling for industry profitability.

Add it to your strategic thinking/planning agenda, what's the worst that could happen......


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