Porters 5 Forces Put Into Formula

Have you ever wondered how to take the complexities of the competitive marketplace and turn them into a clear and simple approach?

Porter's Five Forces offers a structured analysis of industry competition, crucial for new ventures to assess risks, identify opportunities and make strategic decisions effectively.

Applying Porter's Five Forces involves evaluating the competitive environment of the company in a straightforward manner. Before bringing the model's forces into an equation, let's have a brief look at its elements.

1. Threat of New Entrants

• Assess the barriers to entry in the market. Look at factors such as capital requirements, technology, brand loyalty and regulatory hurdles.

• Consider how easily new startups can enter the market and compete with your company.

2. Bargaining Power of Suppliers

• Identify key suppliers and analyse their influence on the company's operations. This includes the uniqueness of their product or service, the number of available suppliers and the cost of switching suppliers.

• Determine if suppliers have leverage to increase prices or reduce the quality of goods or services.

3. Bargaining Power of Customers

• Examine the customers’ influence over pricing and quality. Assess the number of customers, the cost to switch to a competitor and how critical your product is to their operations.

• Evaluate if customers can drive prices down or demand higher quality or more service.

4. Threat of Substitute Products or Services

• Identify alternative products or services that customers might use. This includes direct substitutes and those that fulfill the same need differently.

• Assess the ease with which customers can switch to these substitutes and their potential impact on your company’s market share.

5. Industry Rivalry

• Analyse the intensity of competition within the industry. Look at the number of competitors, their relative sizes, growth rates and the differentiation of their products or services.

• Consider the strategies competitors use and how aggressive they are in terms of pricing, marketing and innovation.

For a venture, it's crucial to keep this analysis concise and focused on the most impactful factors. This quick evaluation can help you understand the competitive pressures and strategic position of the company within its market.

The Five Competitive Forces That Shape Strategy (Michael E. Porter, Professor at Harvard University)

Porter 5 Forces Put into Formula

What if you could distill the complexity of market competition into a simple formula that guides every strategic decision you make? How would it change your approach to building and sustaining a successful business?

Formulating Porter's Five Forces into a structured formula enhances competitive analysis, offering clarity, quantifiability and standardisation for efficient decision-making and communication. Assigning scores to each force enables quantitative assessment, aiding in identifying strengths and weaknesses for strategic planning, streamlining the evaluation process for stakeholders.

Porter's Five Forces Score = E + S + C + B + R

E  = Threat of New Entrants

S  = Bargaining Power of Suppliers

C  = Bargaining Power of Customers

B  = Threat of Substitute Products or Services

R  = Industry Rivalry

Each force can be scored on a scale from 1 to 5

1 = Low impact/pressure

5 = High impact/pressure

Step-by-Step Calculation

Threat of New Entrants (E)

• Score based on barriers to entry.

• Evaluate factors such as capital requirements, technology, brand loyalty and regulatory hurdles.

Bargaining Power of Suppliers (S)

• Score based on supplier influence.

• Assess the uniqueness of their product, number of available suppliers and cost of switching suppliers.

Bargaining Power of Customers (C)

• Score based on customer influence

• Examine the number of customers, cost to switch to a competitor and importance of your product to them.

Threat of Substitute Products or Services (B)

• Score based on availability of substitutes

• Identify alternative products/services and their impact on market share.

Industry Rivalry (R)

• Score based on competitive intensity

• Analyse the number of competitors, growth rates, product differentiation and aggressiveness in strategies.

As you score each force, think about the story these numbers tell. Are you ready to face the challenges head-on or do you need to pivot your strategy to seize new opportunities?

Case Example

Putting theory into practice is where the magic happens. Let’s see how these forces play out in a real-world scenario.

Total Score = E + S + C + B + R

Let's assign hypothetical scores:

Threat of New Entrants: E = 3 (Moderate barriers)

Bargaining Power of Suppliers: S = 2 (Few suppliers, but not critical)

Bargaining Power of Customers: C = 4 (Customers have significant power)

Threat of Substitute Products or Services: B = 3 (Some alternatives available)

Industry Rivalry: R = 5 (High competition)

Porter's Five Forces Score = 3 + 2 + 4 + 3 + 5 = 17

A higher total score signifies increased competitive pressure and market challenges. Adjust the scale and scoring criteria as needed, depending on specific industry characteristics. Ensure that the same measurable metrics are used for each company to achieve objective and comparable results.

"It's good to have high-quality competition; it helps drive research forward at a faster pace." - Shuji Nakamura

Applying Porter’s Five Forces is essential for understanding the dynamics of competition in your industry. This model helps you spot potential risks and opportunities, enabling informed strategic decisions. However, while the analysis offers valuable insights, it's equally vital to stay flexible and responsive to market changes.

As you assess your competitive landscape, are you ready to turn these insights into action? How will you leverage this knowledge to not only navigate challenges but also seize new opportunities and propel your business forward?

As your business evolves, keep a close connection with your customers and stay attuned to their changing needs. Regularly revisiting your Five Forces analysis and adjusting your strategies will help you maintain a competitive edge and achieve lasting success.