Porter's five forces
Welcome to these learning resources that focus on a tool for analysing the business environment in which an organisation operates, Porter’s five forces. In the audio clip (to the right) your HR tutor Andrew gives an overview of topic and its relevance, and below is a summary of how this fits with the intermediate and advanced CIPD units.
1. Porter's five forces - an overview
When selecting a tool to analyse the business environment PESTLE and SWOT spring to mind. Whilst PESTLE identifies external factors, which in turn can be opportunities or threats, it can neglect factors that are specific to the organisation’s sector and therefore competitive environment. This is where Porter’s five forces model can play a part.
Porter’s Five Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps an organisation understand both the strength of its current competitive position, and the strength of a position it’s considering moving into.
The text below explains each of the forces in more detail. To aid your understanding make a note of the forces present in your organisation’s environment.
Bargaining power of suppliers
How easy it is for suppliers to drive up prices? This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over the organisation, the cost of switching from one to another, and so on. The fewer the supplier choices an organisation has, and the more it needs suppliers’ help, the more powerful its suppliers are.
Bargaining power of buyers
How easy it is for buyers to drive prices down? This is driven by the number of buyers, the importance of each individual buyer to the business, the cost to them of switching to the products and services of someone else, and so on. If an organisations deals with few, powerful buyers, then they are often able to dictate terms to it.
Threat of new entrants
How easy is to enter the organisation’s market? If it costs little in time or money to enter the market and compete effectively, if there are few economies of scale in place, or if the organisation has little protection for its key technologies, then new competitors can quickly enter its market and weaken its position. If the organisation has strong and durable barriers to entry, then it can preserve a favourable position and take fair advantage.
Threat of substitutes
How able are customers to find a different way of doing what the organisation does? For example, if the organisation supplies a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens the organisation’s power.
What is important here is the number and capability of the organisation’s competitors. If the organisation has many competitors, and they offer equally attractive products and services, then the organisation most likely has little power in the situation, because suppliers and buyers will go elsewhere if they don’t get a good deal. On the other hand, if no-one else can do what the organisation does, then it can often have tremendous strength.
2. Porter applied
The clip on the right explains how Porter’s model can be applied to the airline industry. It’s quite interesting in the context of recent problems encountered by the airline industry in the UK, for example the end of Monarch.
3. Shaping organisational strategy
The link below takes you to the Harvard Business Review and a page featuring Porter’s original piece in the March 1979 edition. The first section gives more detail on Porter’s five forces models, with examples to aid understanding. Under the heading Formulation of Strategy he explores how organisations can use the data gathered to position itself in the competitive environment. Read this section and make a note of the key points.