Applying Porter Five Forces Analysis to Drive Category Management Insights

In the past two or three weeks, I’ve had the opportunity to work with a number of organizations seeking to drive insights into their supply markets, as they attempt to navigate the choppy waters of global economic change.  One of the tools that we’ve used in these engagements is a trusted standby, the Porter Five Forces analysis tool.

Developed by a Harvard Business school academic, Michael Porter, in his seminal book Competitive Strategy, published in 1980, the framework has proven to be one of the most important tools in the category management toolbox.   This tool is used to describe competitive forces in a market economy.  The application of this tool involves evaluating the relative position of buyers and suppliers in the market, as well as the other forces including substitution, industry rivalry, and new potential market entrants.  The approach is a useful format in which to engage the category team to take a “10,000 foot view” of the market place and evaluate what our company’s relative negotiating position is.

Data used to conduct  a Five Forces Analysis requires a wide array of different inputs, including a spend analysis, supplier analysis, market intelligence, and third party industry reports.  A typical approach is to provide an overview of these data to the team, and use this as a basis for an open and frank discussion in a workshop format with the stakeholders.  During this workshop, the goal should be to list relevant criteria for each of the five forces as a basis for stimulating critical thinking and debate. The end result of this approach will be a high level overview of the market that can help to predict supplier and buyer outcomes from a particular category strategy approach.  It is also a helpful educational tool to lead stakeholders to understand current supply market conditions.

The five forces are:

1.  Internal market rivalry that creates more options for buyers. Factors include:

• Speed of industry growth
• Capacity utilization
• Exit barriers
• Product differences
• Switching costs
• Diversity of competitors

2. The threat of entrants. Examples here might be the new set of Chinese and Low Cost Country manufacturers who are entering many of the traditional US manufacturing strongholds such as electronics, automobiles, etc. This is impacted by:

• Capital markets
• Availability of skilled workers
• Access to critical technologies, inputs or distribution
• Product life cycles
• Brand equity/customer loyalty
• Government deregulation
• Risk of switching
• Economies of scale

3. The threat of substitute products and services. For example, there are a new set of growing composites, thermosets, and carbon fibers that are replacing traditional elements such as steel. Factors influencing this include:

• relative performance of substitutes
• relative price of substitutes
• switching costs
• buyer propensity to substitute

4. The power of buyers. For example, as buyers begin to consolidate specifications and develop industry standards, increasing power is created over suppliers in the marketplace. Factors include:

• Buyer concentration
• Buyer volume
• Buyer switching costs
• Price sensitivity
• Product differences
• Brand identify
• Impact on quality or performance
• Buyer profits
• Availability of substitutes

5. The power of suppliers. As many supply markets begin to consolidate, fewer suppliers means that a greater amount of supplier power exists in markets. Factors include:

• Prices of major inputs
• Ability to pass on price increases
• Availability of key technologies or other resources
• Threat of forward or backward integration
• Industry capacity utilization
• Supplier concentration
• Importance of volume to supplier