The classic strategy framework of Michael Porter of Harvard Business School refers to five primary forces that can generally be applied to any industry, and hence have become widely used and adopted. Knowing it and how to apply it not only helps any businesswoman lead more effectively.

The five forces are based on industrial organizational economics and provide a qualitative overview of a company's position in an industry, including its competitive strength and the attractiveness of various relevant markets. Porter referred to the forces as the microenvironment. They are the forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces usually invokes the need for a company to reassess the marketplace.

Porter's Five Forces are: the threat of substitute products, the threat of established rivals and the threat of new entrants, the bargaining power of suppliers, and the bargaining power of customers.

Each of these forces is comprised of various other factors that vary from industry to industry and company to company. An overview of the forces and how they are affected by each other is below:

In the case of  substitute products, the more close substitute product competitors there are, the greater the chance of a customer switching, or the lower the brand loyalty.

In the area of competitors, the established companies, or the main players, want to put up as many barriers to entry as they can to protect their positions. Copyrights, patents and cost advantages are a few examples of barriers to entry that existing companies will use. 

Profitable markets attract competition in the form of new entrants. New entrants threaten to decrease profitability. Innovation, marketing and the bargaining power of customers are key factors that affect new competition's ability to succeed.

The bargaining power of suppliers is a force that affects the business' ability to differentiate itself. And the costs and amount of administrative efficiency between the company and its suppliers will determine its ability to adjust to changes in the market. The price of raw materials, exclusive relationship or territory agreements may affect supplier pricing and availability. The ratio of suppliers to companies will also give a quick picture of the power of suppliers.
 
The bargaining power of customers, also referred to as the market of outputs, affects the customer's sensitivity to price changes. Factors affecting the customer's ability to shop elsewhere are the premise of the force of the bargaining power of customers. Price sensitivity, the size of the market and the price of the total purchase are some of the factors affecting customers.

This 5 force analysis is a well-known strategic model of Michael Porter's. He developed other widely accepted and commonly used approaches. For more information on Porter see How competitive forces shape strategy, Harvard Business Review.

To quickly test how well you know the Porter Forces, click here to take a self-quiz.