How to define strategy using Porter’s Five Forces (2024)

What is strategy? If you’ve ever researched this question, the name Michael Porter might ring a bell. In fact, Michael Porter’s name has become practically synonymous with business strategy after he created the Five Forces analysis, a tool for analyzing a business’s competition.

So, what does strategy mean? Is it all tied into this Harvard scholar’s school of thought?

To be clear, professionals think about strategy in different ways, so there isn’t a single clear definition of strategy. However, Michael Porter defines strategy as a competitive position, “deliberately choosing a different set of activities to deliver a unique mix of value.” In other words, you need to understand your competitors and the market you’ve chosen to determine how your business should react.

In this article, you'll learn more about Porter’s Five Forces to find your competitive position in the market.

Porter’s Five Forces

In his famous article from the Harvard Business Review, “What Is Strategy,” Michael Porter seeks to define strategy through a series of influences. Porter believed that price couldn’t be the only thing influencing strategy. Each of the Five Forces culminates around an industry’s competitive rivalry.

To define strategy, analyze your firm in conjunction with each of Porter’s Five Forces.

1. Threats of new entry

Consider how easily others could enter your market and threaten your company’s position. Answer the following questions:

  • How much does it cost and how long does it take to enter your market?
  • What are the barriers to entry (e.g. patents, rights, etc.)?
  • What does it take to make the business scalable?
  • Have you protected your key technologies?
  • How strictly is your market regulated?

If competitors can enter your market with little money and effort, you will need to adapt your strategy to handle any potential rivals.

2. Threat of substitution

This section of the Five Forces asks you to determine the likelihood that your customers will replace your product or service with an alternative that solves the same need. Answer these questions:

  • What are the differentiators between your product/service and the substitute?
  • How many substitute products are available in this market?
  • What is the cost of switching to a substitute product?
  • How difficult would it be to make the switch?
  • What products or services can you offer that might substitute a market leader?

Think of what the iPod did to the CD market. The iPod used new technology to fulfill the same need that the CD filled for years—giving customers a portable way to listen to music. Price isn’t always the reason that customers switch to a substitute product. After all, the iPod was much more expensive than a CD player, but people were willing to pay a higher price for a device that held thousands of songs.

3. Bargaining power of suppliers

Analyze how easily suppliers can increase their prices and thus affect your bottom line. Answer these questions:

  • How many suppliers does your company have?
  • How unique is the product or service that they provide?
  • How many alternative suppliers can you find? How do their prices compare to your current supplier? How expensive would it be to switch from one supplier to another?

Remember that your supplier will think strategically, just as you are. If your supplier understands that few other companies could fulfill the same need, they could charge you more for their unique service.

4. Bargaining power of buyers

You also need to determine whether buyers have the power to drive your prices down. Answer these questions:

  • How many buyers control your sales?
  • How large are the orders you receive?
  • Could your buyers switch suppliers? How much would it cost for them to switch?
  • How important is your product/service to your buyers (i.e. what is the ROI of your product/service)?

These questions help determine the leverage your clients have to dictate the cost. The more customers you have, the more power you retain.

5. Competitive rivalries

The four previous forces largely affect this last one. You need to look at the number and strength of your existing competitors. Answer these questions:

  • How many competitors do you have?
  • Who are your biggest competitors?
  • How does the quality of their products or services compare with yours?
  • What distinguishes your company from the competition?
  • What will it cost one of your customers to switch to a competitor?

Remember Microsoft Zune? It was Microsoft’s way to “beat” the iPod. They didn’t.

Microsoft discontinued the Zune in 2012. But why? The Zune cost less, was upgraded with every firmware release, and offered a music subscription service long before Apple announced the now-popular Apple Music.

The simple answer? Branding. Apple had already established the iPod as a cool, trendy product. Additionally, the iPhone launched six months after Zune’s release, thus replacing the need for the iPod and infiltrating the mobile market. By examining the Five Forces within your market, you’ll have a better sense of where you stand with the competition and how you can adapt your strategy to bring in your target audience.

What to take from the Five Forces

So, what does strategy mean now? Porter’s Five Forces devolve into two schools of thought: do what everyone else is doing but cheaper, or do something nobody’s ever done before.

Existing businesses can build on what they already do, either finding ways to maximize efficiency or looking for emerging opportunities and new trends. Look at Facebook. They’re the leading social media platform, but they have expanded into messenger apps, chatbots, and the online marketplace as new markets emerged.

Become a cost leader

Find a way to make your product as cheap as possible. However, don’t sacrifice your standards and ensure you sustain profitability. Your customers expect a standard from you. You need to deliver that standard.

Remember the GiGo lesson from math: garbage in, garbage out. Never sacrifice product standards for price. Just find a way to get what you need in the cheapest way possible. You can more easily streamline processes and determine where to cut costs when you map out your process and analyze the visuals.

Differentiate your product

Brand your product as unique and unparalleled. Or, boil down what industry leaders have done and search for the missing link. What are the next steps? How will your product evolve and outshine the rest?

For instance, Vine was a great concept: six-second films as social media. The company launched into the social media space in 2012. They actually gained a lot of popularity. But was it enough to outshine Facebook, Instagram, and Snapchat? Even with Twitter backing Vine, it fell short. Instagram and Facebook realized they could offer the same, short-form video content on their platforms.

Create a strategy map to document the strategic goalsthat need to be met across your organization in order to truly differentiate yourself.

Focus on buyers

What is each buyer’s unique need? Is it specific to geography? Do they need a particular product they can’t get elsewhere? How can you position your business to be number one in your customer’s minds?

Leveraging your buyers can lead to above-average returns. Always keep in mind what your competitors are doing. Find a way to do it better, cheaper, or differently to suit your buyer’s needs.

Consider creating an empathy map or a customer journey map to better understand your buyer and their needs, and try our competitor analysis template too.

Hopefullywe’ve clarified the elements of strong business strategy. With Porter’s Five Forces, you can find your competitive edge and develop a strategy to move your business to the next level.

How to define strategy using Porter’s Five Forces (1)

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How to define strategy using Porter’s Five Forces (2024)

FAQs

How to define strategy using Porter’s Five Forces? ›

Porter's Five Forces include: Competitive Rivalry, Supplier Power, Buyer Power, Threat of Substitution, and Threat of New Entry. The model encourages organizations to look beyond direct competitors when assessing strategy and, instead, consider broader environmental forces.

What are Porter's five forces How do they apply to operations strategy? ›

Porter's Five Forces include: Competitive Rivalry, Supplier Power, Buyer Power, Threat of Substitution, and Threat of New Entry. The model encourages organizations to look beyond direct competitors when assessing strategy and, instead, consider broader environmental forces.

How to define strategy? ›

Strategy can be difficult to define, but essentially it can be thought of as: "Determining how we will win in the period ahead."

What is Porter's definition of strategy? ›

Moreover, the essence of strategy, according to Porter, is choosing to perform activities differently than rivals. Strategy is the creation of a unique and valuable position, involving a different set of activities.

What is strategy with an example? ›

It refers to any number of practices that allow a company to better utilize its inputs by, for example, reducing defects in products or developing better products faster. In contrast, strategic positioning means performing different activities from rivals' or performing similar activities in different ways.

What is a reasonable strategy according to Porter's model? ›

According to Porter's Generic Strategies model, there are three basic strategic options available to organizations for gaining competitive advantage. These are: Cost Leadership, Differentiation and Focus.

What is a good example of Porter's five forces? ›

The automotive industry is a good example of Porter's five forces model because the first force is the threat of substitutes, which is high for automobiles because there are many vehicles on the market that are cheaper and which serve similar purposes.

What is Porter's competitive strategies explain with examples? ›

Porter's competitive strategies offer a roadmap to competitive advantage through cost leadership, differentiation, or focus. They guide businesses to leverage their strengths and outperform rivals. Pricing, product features, customer service, and market targeting are crucial in executing these strategies.

What is Porter's five forces model and its relevance in formulating strategies? ›

Porter's Five Forces are Threat of new entrants, Bargaining power of buyers, Bargaining power of suppliers, Threat of new substitutes, and Competitive rivalry. This framework helps strategists understand what makes an industry profitable and provides insights needed to make strategic choices.

How is Porter's five forces framework used in developing strategies quizlet? ›

How is Porter's "Five Forces" framework used in developing strategies? Porter's "Five Forces" framework helps strategists understand the competitive forces at work in their industries so that they can assess the strengths and weaknesses of their own competitive position.

How do you determine a strategy? ›

To determine your strategy, you must understand fully the internal and external environmental factors that affect you. With that understanding, you can identify your clear advantages and use these to be successful. From there, you can make informed choices and implement your strategy effectively.

How to write a strategy statement? ›

How to write a strategy statement
  1. Develop a product strategy. ...
  2. Define the strategic objective. ...
  3. Define the scope. ...
  4. Write the value proposition. ...
  5. Write the value discipline. ...
  6. Create the business model canvas.
Nov 30, 2022

What is strategy answer? ›

Strategy is the intelligent allocation of resources through a unique system of activities to achieve a goal. Simply put, strategy is how you plan to achieve a goal.

How to use Porter's five forces? ›

Porter's five forces are used to identify and analyze an industry's competitive forces. The five forces are competition, the threat of new entrants to the industry, supplier bargaining power, customer bargaining power, and the ability of customers to find substitutes for the sector's products.

What is Porter's value strategy? ›

Developed by Michael Porter and used throughout the world for nearly 30 years, the value chain is a powerful tool for disaggregating a company into its strategically relevant activities in order to focus on the sources of competitive advantage, that is, the specific activities that result in higher prices or lower ...

What is the best definition of strategy? ›

Strategy (from Greek στρατηγία stratēgia, "art of troop leader; office of general, command, generalship") is a general plan to achieve one or more long-term or overall goals under conditions of uncertainty.

What is strategy in one sentence? ›

/ˈstræt.ə.dʒi/ us. /ˈstræt̬.ə.dʒi/ B2 [ C or U ] a detailed plan for achieving success in situations such as war, politics, business, industry, or sport, or the skill of planning for such situations: The president held an emergency meeting to discuss military strategy with the Pentagon yesterday.

What is strategy in your own words? ›

Strategy is where you will focus your efforts to achieve your goals, and how you will succeed—or, “where to play and how to win.” It defines a specific course of action that will take you from where you are now to where you want to be.

What does Porter say about strategy? ›

Michael Porter argues that operational effectiveness, although necessary to superior performance, is not sufficient, because its techniques are easy to imitate. In contrast, the essence of strategy is choosing a unique and valuable position rooted in systems of activities that are much more difficult to match.

What are Porter's strategies? ›

Porter wrote in 1980 that strategy targets either cost leadership, differentiation, or focus. These are known as Porter's three generic strategies and can be applied to any size or form of business. Porter claimed that a company must only choose one of the three or risk that the business would waste precious resources.

What is Porter's 5 forces analysis example? ›

Five forces by porter are as follows: Competitors in the industry; Threat of new entrants; Bargaining power of suppliers; Bargaining power of buyers; Threat of substitutes. Competitors operating in the same industry may drive profit margins and revenue down for any given company.

What question is Porter's 5 forces answering? ›

Key Takeaways. Porter's five forces are used to identify and analyze an industry's competitive forces. The five forces are competition, the threat of new entrants to the industry, supplier bargaining power, customer bargaining power, and the ability of customers to find substitutes for the sector's products.

What are Porter's five forces in simple terms? ›

Porter's five forces are competitive rivalry, new entrants, power of buyers, power of suppliers and threat of substitutes. The purpose of Porter's Five Forces analysis is to help businesses understand the competitive dynamics of their industry and make more informed strategic decisions.

What is an example of threat of new entry? ›

Examples of threats of new entrants include: Low barriers to entry: If it is relatively easy and inexpensive for new companies to enter the market, the threat of new entrants is high. For example, if it is easy to start an e-commerce business, the threat of new entrants in the retail industry is high.

How to apply the Porter's five forces model as a powerful tool for companies to conduct environmental analysis? ›

How To Use Porter's Five Forces Model To Your Advantage
  1. Step 1 – Preparation is Key.
  2. Step 2 – Threat of New Entry.
  3. Step 3 – Threat of Substitution.
  4. Step 4 – Supplier Power.
  5. Step 5 – Buyer Power.
  6. Step 6 – Competitive Rivalry.
  7. Bonus Step – Placing Your Current Strategy.

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