Analysis of Porter 5 Forces

Industry Analysis and the Five Forces

This summary is a guide to help you understand and implement the Porter method of analyzing industries and appreciate its importance in the formulation of firm strategy. Porter’s Five Forces framework provides a systematic way to catalogue the competitive situation a firm will face in its industry. The strength of these environmental forces help determine how much of the value created by firms in the industry is likely to be captured by the firms, in terms of profits. Strategic initiatives are often more successful when firms recognize the competitive implications of their business policies.

Here are some quotes from Porter that will help define the role of industry analysis in strategy formulation:

• “The essence of formulating competitive strategy is relating a company to its environment — the key aspect of the firm’s environment is the industry or industries in which it competes.”

• “Competition in an industry continually works to drive down the rate of return on invested capital toward the return that would be earned by the economist’s ‘perfectly competitive’ industry.”

• “The goal of competitive strategy for a business unit in an industry is to find a position in the industry where the company can best defend itself against these competitive forces or can influence them in its favor.”

• The Five Forces, then, “help identify the key structural features of industries that determine the strength of the competitive forces and hence industry profitability.”

So, when we do a Five Forces analysis for any industry, we want to focus on the following questions:

1. Does the underlying structure of this industry indicate that the competitive forces firms face in the industry will be strong or weak?

2. If the competitive forces in the industry are strong, is there some strategy that individual firms might employ to defend itself, or influence the forces in their own favor?

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