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INTERVIEW QUESTION:

Describe Porter’s Five Forces Analysis

Posted by Chris Adams

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Categories: Business Analysis, Leadership & Management, General

ANSWER

Porter’s Five Forces was created by Michael E. Porter of Harvard Business School in 1979. Porter created his analysis framework in response to the well known SWOT analysis which he found to be lacking in rigor.

Porter described his 5 forces as the micro environment of the market because they directly impact the company’s ability to serve its customers and make a profit. The five forces are:

Threat of new competition
Threat of substitute products or services
Intensity of competitive rivalry
Bargaining power of customers (buyers)
Bargaining power of suppliers

Threat of New Competition

As more entrants enter a market, competition within that market increases and pricing power for a company decreases. Understanding how easy it is for new competition to enter the market is essential.

Threat of Substitute Products or Services

A substitute product is different from direct competition. Coke and Pepsi are competitive products. However if the cost of Coke and Pepsi rise too much, buyers may move to substitute products such as water, tea, energy drinks, etc. So you can see how the threat of substitution can impact pricing power.

Intensity of Competitive Rivalry

Competitive rivalry is what most companies immediately consider. Do major players currently exist in the industry? How deep are their advertising budgets? Do they continually innovate to keep a competitive advantage?

Bargaining Power of Customers (Buyers)

The bargaining power of a customer is dependent upon many factors. Does the customer have other companies they can order from? Are there other channels of distribution that a customer can use? Are your company’s products unique in some way which might stave off a customer bargaining power? Is competitor information readily available to the customer? What is the size of the customer market?

Bargaining Power of Suppliers

The bargaining power of a supplier is dependent upon a number of factors as well. How difficult is it for your company to switch to a different supplier? How many other suppliers are in the market? Are there substitute inputs that your company can use to replace a supplier (using a different type of material to create the same part or product)?

Video: Michael Porter explains Porter's Five Forces

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Chris Adams
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Do your homework prior to the business analysis interview!

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