Let's take it back to basics today with one of the most essential frameworks in business - Porter's Five Forces. It's a framework that I've been taught, over and over, from GCSE business years all the way up to my Master's.
The concept was first shared by Michael Porter in his book, "Competitive Strategy: Techniques for Analyzing Industries and Competitors" in 1980. The Five Forces framework is used to analyse the competitive landscape of an industry, making it an essential tool for anyone looking to enter an industry or find better ways to compete within it. The Five Forces are as follows -
Competitive Rivalry
The first of the five forces refers to the intensity and scale of competition within an industry. If an industry is highly competitive, i.e. there are many players that compete fiercely for market share, then individual companies are unlikely to have a lot of power. Other factors include if the industry is growing (meaning there are opportunities for all), or if there are high switching costs.
Threat of New Entrants
In other words, the second of the five forces measure the barriers to entry, as well as the attractiveness of an industry. If the industry has low barriers to entry (let's take dropshipping as an example), it's likely that the competitive power of existing players will be eroded over time. On the other hand, if barriers to entry are high (for example, pharmaceuticals), the industry will consist of players that are likely to have a more stable competitive position.
Bargaining Power of Suppliers
Suppliers are those who provide the inputs that make business happen. If you're a bakery, suppliers are those who make the ovens. If the industry has a huge amount of oven-builders, the bargaining power of suppliers is not very strong. In other words, they can't charge high prices for their ovens, or they'll lose your business.
Bargaining Power of Buyers
The fourth of the five forces is basically the opposite of the third - this aspect measures the bargaining power of buyers. Let's use the same example of the bakery. If your customers have 5 other bakeries in the local area, their bargaining power will be very high - if they don't like the price of your bread, they'll just go somewhere else.
Threat Of Substitute Products
Let's stick with the bakery. If a customer fancies breakfast, they'll come to your shop. The rise of Deliveroo, though, means they can stay in bed and order breakfast from 10 other local spots - the threat of substitutes is high.
There isn't really a key takeaway here - just that the Five Forces framework is an incredibly useful tool to have in your toolkit when it comes to building strategy - both in terms of entering an industry, and finding ways to be more competitive within one.