making better decisions - 7. Porter's Five Forces
Dealing with Difficult People
This email is one in a series on decision-making. The first one is an introduction to the series.
7. Porter's Five Forces
One digram that keeps appearing in a business degree is that of Porter's five forces (first published in HBR in 1979 - HBR subscriber article only). When you're a company, operating in an area of business, you have to deal with five competitive forces.
This is particularly useful when you're trying to decide whether to enter an industry or not, as to how hard it will be to see success in that industry / sector.
Here are the five forces to think about:
- Internal competition from the sector (how well are you doing compared to others doing similar things)
- Threat of new entrants (how easy is it to set up in competition with the incumbents)
- Threat of alternatives (how easy is it for a customer to choose something else instead of your product or service)
- Power of suppliers (how much are you dependent on people who provide resources so you can do what you do)
- Power of buyers (how much are you dependent on what your customers are prepared to pay)
If you're trying to make a decision about where you want to compete, this is an invaluable model as it will force you to look at the bigger picture than just the organisation you're working on, and see how easy or hard it might be to be able to create value where you are looking to operate.
For example, if you were looking to set up a new charity to operate in a particular geographic area, you could think through these five forces.
Some questions you might ask could be:
- How many similar charities are operating in this location?
- Is it difficult / costly to set up a new charity in this location?
- Would my donors want to stay with me, or might they move to a different charity if they perceived that was a better option?
- Will I still be able to operate in this area if I have a disagreement with my donors?
- Are there enough people in this area for my charity to serve? Might they go elsewhere?
If you were considering some different locations, one approach could be to ask these questions of each location, and score each question for high/medium/low concern, so you can compare the areas across the five forces.
This five forces framework would generally be used in conjunction with other frameworks, and is a reminder that pausing and looking around at the systems that surround your decision can improve the quality of your decisions.
Have you heard of Porter's five forces before? Would you like a different example of questions you could ask? Hit reply and let me know.