What Are Porter's Five Forces

Porter's Five Forces is a model that identifies and analyzes five competitive
forces that shape every industry and helps determine an industry's
weaknesses and strengths. Five Forces analysis is frequently used to identify
an industry's structure to determine corporate strategy.

Porter's model can be applied to any segment of the economy to understand

the level of competition within the industry and enhance a company's long-
term profitability. The Five Forces model is named after Harvard Business
School professor, Michael E. Porter.

Porter's 5 forces are:

1. Competition in the industry

2. Potential of new entrants into the industry
3. Power of suppliers
4. Power of customers
5. Threat of substitute products1

Understanding Porter's Five Forces

Porter's Five Forces is a business analysis model that helps to explain why
various industries are able to sustain different levels of profitability. The
model was published in Michael E. Porter's book, Competitive Strategy:
Techniques for Analyzing Industries and Competitors in 1979.1

The Five Forces model is widely used to analyze the industry structure of a
company as well as its corporate strategy. Porter identified five undeniable
forces that play a part in shaping every market and industry in the world,
with some caveats. The Five Forces are frequently used to measure
competition intensity, attractiveness, and profitability of an industry or
market.
1. Competition in the Industry

The first of the Five Forces refers to the number of competitors and their
ability to undercut a company. The larger the number of competitors, along
with the number of equivalent products and services they offer, the lesser
the power of a company.

Suppliers and buyers seek out a company's competition if they are able to
offer a better deal or lower prices. Conversely, when competitive rivalry is
low, a company has greater power to charge higher prices and set the terms
of deals to achieve higher sales and profits.

2. Potential of New Entrants Into an Industry

A company's power is also affected by the force of new entrants into its
market. The less time and money it costs for a competitor to enter a
company's market and be an effective competitor, the more an established
company's position could be significantly weakened.

An industry with strong barriers to entry is ideal for existing companies

within that industry since the company would be able to charge higher prices
and negotiate better terms.

3. Power of Suppliers

The next factor in the Porter model addresses how easily suppliers can drive
up the cost of inputs. It is affected by the number of suppliers of key inputs
of a good or service, how unique these inputs are, and how much it would
cost a company to switch to another supplier. The fewer suppliers to an
industry, the more a company would depend on a supplier.

As a result, the supplier has more power and can drive up input costs and
push for other advantages in trade. On the other hand, when there are many
suppliers or low switching costs between rival suppliers, a company can keep
its input costs lower and enhance its profits.

4. Power of Customers

The ability that customers have to drive prices lower or their level of power is
one of the Five Forces. It is affected by how many buyers or customers a
company has, how significant each customer is, and how much it would cost
a company to find new customers or markets for its output.

A smaller and more powerful client base means that each customer has
more power to negotiate for lower prices and better deals. A company that
has many, smaller, independent customers will have an easier time charging
higher prices to increase profitability.

The Five Forces model can help businesses boost profits, but they must
continuously monitor any changes in the Five Forces and adjust their
business strategy.

5. Threat of Substitutes

The last of the Five Forces focuses on substitutes. Substitute goods or

services that can be used in place of a company's products or services pose
a threat. Companies that produce goods or services for which there are no
close substitutes will have more power to increase prices and lock in
favorable terms. When close substitutes are available, customers will have
the option to forgo buying a company's product, and a company's power can
be weakened.

What is Porter’s Five Forces model?

Developed in 1980 by a Harvard Business School academic, Michael Porter,

this tool has become quite significant in today’s business management. The
five forces have helped both the procurement and supply chain organizations
to outperform and shift from being just a ‘service’ to becoming a full-fledged
‘function’. By using the Porter’s model, it is now easier for procurement and
supply chain professionals to describe their strengths in their respective
industries and identify their competitive forces.

Evaluating the comparative positioning of buyers and sellers within specific

industries has also helped many professionals to assess their negotiating
power on the overall market. The powers of Porter’s five forces model can
alleviate many business difficulties in any given corporate situation, provided
they are efficiently implemented.

Porter’s five forces model in depth:

1. Intensity of competitive rivalry

Competitive rivalry allows professionals in procurement and supply chain

industries to analyze the speed of industry growth. Apart from using metrics
only, it is important to keep initiating strategies to grow along with other
competitors and not be left behind. Additionally, it is also important to keep
an eye on the product evolution in the market. Moreover, the tool constantly
encourages companies for product optimization by knowing when to diversify
and capitalizing on their resources.

2. Threat of new entrants

Monitor new entrants on the market. This may well refer to an organized
group of skilled individuals who may offer same product service as your
organization. However, they may also have better technologies to implement
what you already have. Improving and bettering your product should be a
never ending process. As a company, if you need to increase your sales, then
go ahead. This is perceived as economies of scale, through which you save
costs by identifying what your competitors are doing and decide whether you
may need to expand productivity.

3. Threat of substitute products or services

Is your industry being threatened by substitute products or services?

Diversification or optimizing your product may save your company from
substitute products being introduced by rival companies. Many huge
companies have assessed their rival products and enhance theirs, in order to
stay in line with the competition or at least tried to achieve something more
usable or creative. Furthermore, analyze the relative performance of the
substitute product or service. If necessary, switch to lower costs but keep in
mind to monitor which product buyers are more inclined to.

4. Bargaining power of buyers

The power of buyers consists of gathering data in the marketplace so as to

develop specific industry standards. Concentration is leaned on which
company’s product attracts most customers. The creation of your Brand
identity is also vital to the existence of your organization as this will
demarcate you from other competitors. Also, observe to which degree
competitor’s product prices may affect consumer’s purchasing behaviors.
Evaluate the risks posed with the manufacturing of your products and
whether they will be sustainable and compliant to industry norms.

5. Bargaining power of suppliers

The power of suppliers is also not negligible. Consider a supply market

starting to consolidate. Fewer suppliers on the market would mean that a
greater extent of supplier power exists on the market. Suppliers need to
focus their energy in gathering key technologies or resources for a faster but
secure delivery of products. As an example, consider New Zealand which is
one of the largest manufacturer and supplier of dairy products in the world.
In order to have a fast and sustainable supply chain, they have relied on
mega trains as means of transport in difficult weather conditions, rather than
just depending on large trucks. Also, the mega trains are equipped with
latest technologies to preserve the dairy products.

Bottom line

At the end of the Porter’s five forces model analysis, your goal should be to
list relevant data acquired as a basis to launch a stimulating critical thinking
and debate. Your organization should come up with strategies and action
plan which will help you outperform your competitors. You will have an
overview of the market, helping your business to grow.

Framework/theory

Porter's Five Forces of Competitive Position Analysis were developed in 1979 by Michael E
Porter of Harvard Business School as a simple framework for assessing and evaluating the
competitive strength and position of a business organisation.

This theory is based on the concept that there are five forces that determine the competitive
intensity and attractiveness of a market. Porter’s five forces help to identify where power lies in a
business situation. This is useful both in understanding the strength of an organisation’s current
competitive position, and the strength of a position that an organisation may look to move into.

Strategic analysts often use Porter’s five forces to understand whether new products or services
are potentially profitable. By understanding where power lies, the theory can also be used to
identify areas of strength, to improve weaknesses and to avoid mistakes.

Porter’s five forces of competitive position analysis:

The five forces are:

Supplier power. An assessment of how easy it is for suppliers to drive up prices. This is driven
by the: number of suppliers of each essential input; uniqueness of their product or service;
relative size and strength of the supplier; and cost of switching from one supplier to another.

Buyer power. An assessment of how easy it is for buyers to drive prices down. This is driven by
the: number of buyers in the market; importance of each individual buyer to the organisation;
and cost to the buyer of switching from one supplier to another. If a business has just a few
powerful buyers, they are often able to dictate terms.

Competitive rivalry. The main driver is the number and capability of competitors in the market.
Many competitors, offering undifferentiated products and services, will reduce market
attractiveness.

Threat of substitution. Where close substitute products exist in a market, it increases the
likelihood of customers switching to alternatives in response to price increases. This reduces
both the power of suppliers and the attractiveness of the market.

Threat of new entry. Profitable markets attract new entrants, which erodes profitability. Unless
incumbents have strong and durable barriers to entry, for example, patents, economies of scale,
capital requirements or government policies, then profitability will decline to a competitive rate.
Arguably, regulation, taxation and trade policies make government a sixth force for many
industries.
(b)

Enterprise risk management (ERM) is the process of identifying, assessing,

managing, and monitoring potential risks. Its overarching goal is to minimize
the harm that risks might cause an organization. Most organizations do face
many risks, after all. Examples include cyber-attacks, data breaches,
operational disruptions, system failures, economic or political crises, and
natural disasters. With an effective risk management process, a company
can identify which of these risks pose the biggest threats, and then
implement the best measures to those risks at acceptable levels.

This risk management process consists of a series of steps or activities. This

article explores these steps in detail so that you can set up an effective risk
management program within your own organization.

What Are the Benefits of a Risk Management Process

A reliable risk management process and a detailed risk management plan

can help you understand and control risk. That, in turn, empowers
management to make better decisions and assure the company achieves its
objectives.

The key benefits of a risk management process are below.

Effective risk identification and response

One benefit of a risk management process is risk identification. Identifying

risks early, before they can harm the business, is critical. By identifying
current and potential risks, you can take appropriate steps to prevent them
from happening and protect the organization from material damage.
Optimize the enterprise risk strategy

A risk management process helps risk managers to craft an effective risk

management strategy that guides the organization’s risk mitigation efforts.

Efficient use of resources

A proper risk management process lets employees perform critical risk

management tasks consistently and efficiently, without wasting resources,
time, or effort.

Standardized risk reporting and clear risk communication

A systematic risk process can improve risk reporting and make it easier to
quantify and communicate risk-related information to relevant stakeholders.

Create a risk-focused corporate culture

An effective risk management process requires a strong tone from the top
(senior management and board) as well as sustained effort from middle
managers and rank-and-file employees. As an organization-wide effort, ERM
increases risk awareness and reinforces appropriate risk-averse behaviors.
Over time, it helps create a robust and beneficial risk-averse corporate
culture.

The 5-Step Risk Management Process

The best risk management programs follow a five-step risk management

process. These steps will prepare your firm to identify, treat, and manage
possible risks. They will also help you manage and monitor risks, which is
essential to protect the company from adverse circumstances.
Step 1: Risk Identification

Every organization has its own “risk profile” – the assortment of risks that
might strike, as well as the chance and severity of each risk that happens.
Hence it’s vital to identify which categories of risks pose threats to your
company. These risks include:

 Cyber risk
 Operational risk
 Geopolitical risk
 Legal risk
 Compliance/regulatory risk
 Financial risk
 Strategic risk
 Environmental risk

The extent to which these risks might affect the organization will become
more apparent during Step 2, risk assessment and risk analysis.

Best practices for risk identification

It can be difficult to identify all the risks relevant to the organization; that’s
why brainstorming is useful. Leverage the collective knowledge of
management and employees! Ask them about the risks they have
experienced or may have insights about. This exercise is a great way to
identify as many risks as possible, improve risk communication, and foster
cross-functional learning.

Create a risk log or risk register to document current risks and track risk
management activities. Finally, establish the criteria you will use to assess
and prioritize potential risks in Steps 2 and 3, respectively.
Step 2: Risk Assessment and Analysis

Once you identify the risks that are relevant to the organization, clarify two
key pieces of information:

 The odds that those potential risks will occur (likelihood)

 What will happen if they do occur (impact)

The goal is to better understand the company’s exposure to each risk that
may affect its operations and goals in the short, medium, and long term. The
analyses will also inform your risk response and management approach,
which in turn will:

 Protect the organization’s assets

 Improve enterprise-wide decision-making
 Optimize operational efficiency
 Avoid material damage
 Save money, time, and resources

Best practices for risk assessment and analysis

Evaluate how many business functions are affected by each risk, and to what
extent (risk scope). Also map the identified risks to the different business
processes, policies, procedures, and documents to determine the effects of
each risk.

Such an analysis will guide your risk prioritization efforts in Step 3. In most
cases, the greater the number of functions that are affected by the risk, the
higher its severity and response priority. The smartest and fastest way to
carry out these activities is to use an automated risk management solution
like Reciprocity’s ROAR platform.
Step 3: Risk Evaluation and Prioritization

After completing the risk assessment, evaluate each risk by comparing it

against the risk criteria you established in Step 1. Some examples of risk
criteria are:

 Associated costs and benefits

 Socio-economic risk factors
 Legal or compliance requirements

Then analyze each risk and determine its potential for disruption or damage.
Ask yourself these questions to guide your analysis:

 How likely are these risks to occur?

 If they do, what will the consequences be?

These answers will help you determine the severity of each risk. You can
then rank and prioritize them, and determine the appropriate risk response.
Risks that will lead to minor inconvenience should be a lower priority, while
those that can cause catastrophic losses should be at the top.

Best practices for risk evaluation and prioritization

While ranking risks, consider both likelihood and potential effect. Your
business may be vulnerable to a risk with a very high probability of
occurrence but a low impact. In this case, you may not want to prioritize it
for immediate action. On the other hand, a high-impact, low-probability risk
may require urgent action and even upper management intervention.

Also prepare the company’s risk profile, which consists of its risk appetite
and risk tolerance. Some organizations are comfortable accepting many
risks, while others want their risk exposure to be zero. Determine where your
company falls on this spectrum.
Step 4: Risk Response and Treatment

Risk treatment involves implementing controls, policies, and procedures to

avoid, minimize, or mitigate identified risks. In general, you can choose from
one of four risk responses:

 Avoid risk
 Accept risk
 Transfer risk
 Reduce risk

Your chosen risk response will vary depending on the likelihood and impact
of the risk. It’s crucial to map these choices to specific actions for effective
risk management.

For example, if a data breach could severely harm business continuity, then
accepting, transferring, or reducing the risk may not be the appropriate
response. Instead, you should act to avoid the risk with robust cybersecurity
and information security controls.

At the same time, you may not be able to avoid every kind of cybersecurity
risk. You can, however, reduce the potential financial harm of a cyberattack
by purchasing cybersecurity insurance. This risk response is an example of
risk transfer where you transfer risk to a third party: an insurance company.

Best practices for risk treatment

Review all highest-ranked risks and plan measures to mitigate them. Also
update the risk management plan with these risk response tactics. Make
sure the plan includes details about:

 Risk mitigation strategies

 Risk prevention methodology
 Contingency plans to handle the risks if they occur
Step 5. Risk Monitoring

Risk management is an ongoing process that doesn’t end with risk

identification or mitigation. To minimize the organization’s risk exposure, it’s
crucial to monitor the risk landscape on an ongoing basis.

References
 Hubbard, Douglas (2009). The Failure of Risk Management: Why It's Broken and How to Fix It. John
Wiley & Sons. p. 46.
 ISO/IEC Guide 73:2009 (2009). Risk management — Vocabulary. International Organization for
Standardization.

 ISO/DIS 31000 (2018). Risk management — Principles and guidelines on implementation. International
Organization for Standardization.

 ISO 31000:2018 - Risk management - A Practical Guide (1 ed.). ISO, UNIDO. 2021. ISBN 978-92-67-
11233-6. Retrieved 17 December 2021.

 "Risk Manager" Society for Human Resource Management

 "What Are Risk Analysts & Risk Managers?", CFA Institute

 Dionne, Georges (2013). "Risk Management: History, Definition, and Critique: Risk Management". Risk
Management and Insurance Review. 16 (2): 147–166. doi:10.1111/rmir.12016. S2CID 154679294.

 "The ascent of risk". [Link]. Retrieved 2021-12-13.

 "Target fixation in risk management. Arguments for the bright side of risk". Stefan Morcov. 2021.
Retrieved 2021-12-13.

 Morcov, Stefan (2021). Managing Positive and Negative Complexity: Design and Validation of an IT
Project Complexity Management Framework. KU Leuven University. Available at
[Link]

 "Committee Draft of ISO 31000 Risk management" (PDF). International Organization for
Standardization. 2007-06-15. Archived from the original (PDF) on 2009-03-25.

 Mandelbrot, Benoit and Richard L. Hudson (2008). The (mis)Behaviour of Markets: A Fractal View of
Risk, Ruin and Reward. London: Profile Books. ISBN 9781846682629.

 "Risk Identification" (PDF). Comunidad de Madrid. p. 3.