You Ask, I Answer: How Useful is Porter's 5 Forces?

Katy asks, “How applicable is Porter’s 5 Forces for you in your career/firm?”

The short answer is that Porter’s 5 Forces, while an excellent abstract strategic framework, is exceptionally difficult to quantify and thus manage against. It’s the sort of thing that’s good at the start of a company, when you’re working out the market space, but not something you’ll use on a regular basis. Watch the video for details.

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Machine-Generated Transcript

What follows is an AI-generated transcript. The transcript may contain errors and is not a substitute for watching the video.

Christopher Penn In today’s episode, Katie asks how applicable is Porter’s five forces for you, in your career or firm? If you don’t recall, and for some folks, it may have been a little while since business school if you if you made it to business school, which is totally fine if you didn’t Porter’s five forces is a strategic framework to determine the sort of industry rivalry, how competitive is an industry? And how likely is it that your firm your company is going to face a lot of pressure from competitors.

So let’s actually bring up the model here.

Here we have Porter’s five forces we have it’s really structured but essentially you read it left, right and then top to bottom.

So left to right.

You have the threat of new entrants, meaning that there’s a new company to come into your space and disrupt you.

There’s your company in the middle and then there is a On the other side of that the threat of substitutes meaning a company that does what you do, but can be substituted in for you, the more there are substitutes the more likely you are facing commoditization.

Right think about a plumber right? Plumbing Companies the substitute is pretty obvious it’s any plumber right? Because for the category as a whole, there’s not a whole lot that sets one plumber apart from the other right it’s all relationship based, same with new entrants, if classic case of that was you know, cars taxi, the taxi industry being disrupted by Uber right new entrant came in and and wrecked the marketplace.

vertically, you have the bargaining power of suppliers, namely how much leverage they have over you for what they supply you and the bargaining power of buyers how much pricing pressure a buyer can apply to your company based on their willingness to to squeeze you a real good example that This one is a Bed Bath and Beyond nobody shops there unless they have a coupon.

Right? So people, people have been so trained by that company basically being in permanent sale mode that they can’t do any normal business if they’re not sending out like a 30% off coupon.

So this framework is a good, abstract strategic framework, right? It is something that you can sit down and do as a thought exercise.

Anytime you’re doing a major strategic pivot or decision if you’re starting a new company, if you are trying to change the purpose of your company, this is a really good framework.

It is good for you know, that annual board strategic retreat or senior executive strategic meeting or whatever.

But the challenge with Porter’s five forces and its use is that because it is so abstract, it is very difficult to quantify and it’s very Difficult, therefore, to manage against each of these categories, you can make some kind of framework that has some numbers attached to it right.

And, you know, threat of new entrants isn’t, you know, number of competitors, how many of them are there? And was their market share threat of substitutes, you know, what, how comparable are our competitors on features and pricing.

And what you’ll end up with is sort of a massive spreadsheet that starts to look a lot like a major consulting firms two by two matrix, right.

That said, you can’t really manage against that because assembling one of those things is a massive, very labor intensive process and keeping the data up to date.

kind of tough, right? Because again, it’s it’s a lot of legwork.

The same is true for you know, the bargaining power of suppliers and buyers, very different types of measurement.

And so you can kind of sort of measure Porter’s five forces, but when it comes to you Using a strategic framework to measure against on a regular frequent basis, you’re actually much better off with a SWOT analysis because SWOT Analyses allow you to, to really keep track of a discrete set of data, right, a SWOT analysis for social media is a good way to segment out your, your data and look at just one channel SWOT analysis for email SWOT analysis for search engine optimization for SEO.

That framework will be much more practical to use on a regular basis.

So when you’re making a major strategic change, for decide forces is the way to go.

When you’re trying to manage on a regular basis, use a SWOT analysis instead.

I would say with Porter’s five forces we use that at the beginning, when I when my partner and I co founded Trust Insights and we we use a variant of it To try and understand how should we position the company.

And there were, there’s always a threat of new entrants in any industry, there really was no threat of substitutes because data science is this such a limited talent pool, that it’s not like you can create a massive Goliath overnight, the bargaining power of buyers is relatively low, because if buyers have a need, they know they don’t have any way to fulfill that need because again, the talent shortage in the field.

And then the bargaining power of suppliers.

At least a service firm which is what we are there, we don’t really have suppliers, right other than, you know, tools and software and most of what we use is open source.

So there is no bargaining power.

So it puts us in a very interesting position that has been very advantageous.

We do on a fairly regular basis.

Keep an eye on What’s happening in the industry but everything we’ve seen thus far indicates that the conditions for the creation of our company have gotten better instead of worse, or, I should say are more advantageous rather than less advantageous because it really is no good or bad.

So that’s the long answer Porter’s five forces, good strategic, abstract stickle SWOT analysis for for operational stuff, and maybe we’ll cover that in another episode.

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