Situational Analysis and Strategic Assessment
In the Lesson Initiating Strategic Planning (How) we discussed the five decisions to creating a strategy. During this lesson we will cover Part 1 of Decision 1: WHAT:
- Part 1: Where are we? (Situational Analysis and Strategic Assessment: Internal and External Environments.)
For the situational analysis we will be using two frameworks with which to analyse he external environment. These frameworks are:
- Porter’s Five Forces
- PEST
We will start with Porter’s Five Forces in this lesson and continue with PEST in the following lesson.
Five Forces That Shape Strategy from Michael Porter
Michael Eugene Porter is an American academic known for his theories on economics, business strategy, and social causes. He is the Bishop William Lawrence University Professor at Harvard Business School. He is the creator of Porter’s Five Forces, a framework addressing forces that can be used to guide business strategy to increase competitive advantage.
What is the Porter’s Five Forces Framework
It is a method of analysing the operating environment of a competitor business. It draws from industrial organisation economics to derive five forces that determine the competitive intensity and, therefore, the attractiveness (or lack thereof) of an industry in terms of its profitability. An “unattractive” industry is one in which the effect of these five forces reduces overall profitability. The five-forces perspective is associated with its originator, Michael E. Porter of Harvard University and was first published in Harvard Business Review in 1979.
Porter refers to these forces as the micro-environment, to contrast it with the more general term macro-environment, represented through the PEST acronym. The five forces include three forces from ‘horizontal competition’ – the threat of substitute products or services, the threat of established rivals, and the threat of new entrants – and two others from ‘vertical’ competition – the bargaining power of suppliers and the bargaining power of customers.
A change in any of the forces normally requires an organisation to re-assess the marketplace given the overall change in industry information.
Porter developed his five forces framework in reaction to the then-popular SWOT analysis, which he found lacking in rigor.
The Five Forces That Shape Industry Competition
Understanding the Five Forces
The Expert Says:
An Interview with Michael E. Porter
An Interview with Michael E. Porter, Professor, Harvard University. Porter’s five competitive forces is the basis for much of modern business strategy. Understand the framework and how to put it into practice. 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.
Article Michael E. Porter: The Five Competitive Forces That Shape Strategy