Product Strategy Tools - Porter's Five Forces

 Overview

Michael Porter is a professor at the Harvard Business School and, in his book "Competitive Strategy: Techniques for Analyzing Industries and Competitors", defined a framework that models an industry as being influenced by five key structural features (forces) that determine the strength of the competitive forces within the industry and hence industry profitability.  The five forces are:  Buyer Power, Supplier Power, Threat of Entrants, Threat of Substitutes, and Competitive Rivalry.  Together these factors influence market attractiveness.  Depending on their combination, intensity can be cut-throat and thus result in poor profits or it may be moderate and result in higher profits.  Firms can monitor the alignment of the five forces to match their strengths and weaknesses to the market’s structure, to anticipate market changes, to identify diversification opportunities, to reconfigure the rules of competition, and to ensure that their dominant position remains undiminished.

The strategic product manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates. For a more detailed description of the five forces within Porter's model, click here.

Porter's 3 Generic Strategies

Porter also defined three generic strategies that a firm can use to counter the effects of the five forces. These strategies are; Cost Leadership, Differentiation, and Focus. The Cost Leadership strategy calls for the firm to be the low cost producer within the industry, for a given level of quality. The Differentiation strategy requires the firm to create unique features or capabilities for the product or services that are valued by customers and that customers perceive to be better than or different from the products of the competition. Finally, the Focus strategy concentrates on a narrow market segment and, within that segment, attempts to achieve either a cost advantage or differentiation. The premise is that the needs of the market segment  can be better serviced by focusing entirely on it. A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly.

The following table illustrates how these generic strategies can be used to counter the effects of Porter's five forces on the industry or industry segment.

Generic Strategies and Industry Forces

Industry Force	Generic Strategies
	Cost Leadership	Differentiation	Focus
Entry Barriers	Ability to cut price in retaliation deters potential entrants.	Customer loyalty can discourage potential entrants.	Focusing develops core competencies that can act as an entry barrier.
Buyer Power	Ability to offer lower price to powerful buyers.	Large buyers have less power to negotiate because of few close alternatives.	Large buyers have less power to negotiate because of few alternatives.
Supplier Power	Better insulated from powerful suppliers.	Better able to pass on supplier price increases to customers.	Suppliers have power because of low volumes, but a differentiation-focused firm is better able to pass on supplier price increases.
Threat of Substitutes	Can use low price to defend against substitutes.	Customer's become attached to differentiating attributes, reducing threat of substitutes.	Specialized products & core competency protect against substitutes.
Rivalry	Better able to compete on price.	Brand loyalty to keep customers from rivals.	Rivals cannot meet differentiation-focused customer needs.

For a more detailed description of Porter's three generic strategies, click here. 

Uses for Porter's Five Forces model

Porter's five forces framework is a classic business strategy model and is used to provide a qualitative view of a company's strategic position. It is a general framework and, as such, is too simplistic to be used as to create a product strategy. It is, however, an useful tool for assessing strengths and weaknesses within a product strategy.
The five forces framework is also a useful tool if you are considering moving into new markets, whether as a product diversification strategy or via acquisitions. It is easy jump into a diversification or acquisition product strategy and be blinded by the opportunities and synergies that these strategies can offer without fully evaluating the market place that you are about to enter. Sometimes the M&A team can oversell the opportunities of a new acquisition, or the sales team can be chomping at the bit to get at the promised new prospects with a jump into a new market (with new or existing products). This enthusiasm sometimes makes companies jump before they look. A five forces analysis of that target market will highlight the competitive forces at play in that market and will help to show whether it is a hostile environment or not. Business leaders within the company would do well to take note of the analysis - it might not change their mind, but it will allow them to make a decision in light of the facts and not get blindsided later.

My Experience with Porter's Five Forces

My main experience with the use of Porter's five forces model is as supporting materials for a move into a seemingly attractive and adjacent market. A part of the discussion was a 'Buy or Build' decision i.e. acquire a small company already in the market or create our own product offerings. The five forces analysis highlighted the challenges facing new entrants into the market ("Barriers to Entry") and the dominant position of the suppliers in the market ("Importance of Suppliers' Input to Buyer" and "Suppliers' Threat of Forward Integration"). This tipped the 'buy or build' decision in favor of 'buy' i.e. acquire a company with existing relationships with the suppliers rather than create our own product offerings and try to build new relationships with suppliers who were already contemplating a forward integration strategy.

In my overview post, I said that I would provide examples of the output from the various tools. Unfortunately, this is not possible for the Porter's Five Forces analysis. The output is highly specific to the circumstances of the analysis and, as such, contains some very confidential information. I would be breaking my confidentiality agreement with a previous employer if I was to reveal this information. Any attempt to sanitize the output would render it meaningless and no better than you could get via the links that I've already provided.