How to Use Porter’s 5 Forces to Assess Your Market

Identify your organization’s major threats and opportunities by assessing these five aspects of your market.

As you begin your strategic planning process, it’s important to assess the market you’re competing in. A classic tool for doing so is Porter’s five forces. Dr. Michael Porter, who’s a professor of strategy, came up with this set of five forces to evaluate all the different dynamics that can affect your organization.

Rivalry Among Competitors

First, look at competitive rivalry, how many competitors are in the marketplace? How do they behave? How are they distributed by market share? How do they go to market, what are their core competencies?

Threats of New Entry

Second, look at the threats of new entry. So there’s the existing set of competitors or there are new competitors who will enter the market. Evaluate how much does it take to get into the market? Will I have to build huge factories or can I just launch a website to compete against you? So understanding those threats of new entry.

Threats of Substitution

Next, look at the threat of substitution. You have your products, what other products could meet that need for your customers? Understand what customers are buying, not necessarily what you’re selling.

Buyer Power

Then you have to evaluate buyer power. So these are your customers buying from you. Are you the big player in the market or are your customers? For my firm, there’s a great deal of buyer power. I sell to large companies and I’m a small training firm. So there’s a lot more buyer power that I have to deal with.

Supplier Power

Next, you need to look at supplier power. The people who are providing raw materials and inputs to your business. Are they big, are they small, how much power do they have from a pricing standpoint? And by looking at all five of these dynamics, you’ll be able to identify where are the major threats, where are the opportunities that we can pursue? And it can generate some interesting insights when you’re rigorous about going through this process.

Case Study: Scotts Miracle-Gro

When I worked at Scotts Miracle-Gro, we were going through our strategic planning process. And as we were looking at the threats of substitution, our CEO came up with a very interesting insight. We were in the lawn and garden industry and we sold lawn and garden products to consumers. When we looked at the threat of substitution, the entire team was saying well the substitutes are our competitor’s lawn and garden products. Our CEO said no actually, Google and YouTube are the threats of substitutes. We all scratched our heads and said what do you mean? He said what we’re really competing for is the consumer’s time. And is that consumer going to spend their discretionary time in their garden working on their trees and shrubs and lawn or are they going to spend their time on YouTube and Google and the internet? And it was a very clear picture of where the threat came from, and it led us to approach our business very differently.

So by doing this assessment of Porter’s five forces across your entire market and your organization, you’ll be able to identify where the major threats and opportunities are that your organization faces.

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