Formulating a Business Strategy Using Michael Porter’s Five Forces

Formulating a business strategy is an excellent way for a company to fully understand its competitors. A business strategy is a tool that will expose a company’s position within its industry; and through learning this, the company is able to strategically position itself into the top spot within said industry.

Michael Porter is a renowned expert on formulating business strategies, and he is responsible for defining the five factors that make up a holistic understanding of business ‘competition’. Porter’s ‘Five Forces’ describe the different types of ‘competitor’, using a much broader definition that goes beyond direct rivals – those companies that offers a similar product or service to your own.

There are four other competitive forces that will help to define the success or failure of a company: potential entrants, customers, suppliers, and the presence of an alternative or substitute product.

Porter’s five competitive forces have been extremely influential amongst business strategists, including retired independent business advisor Nilesh Waghela. Waghela worked with his clients to formulate effective and successful business strategies, using Michael Porter’s ‘Five Forces’ as the basis of his work. Porter’s analysis has helped shape the strategies of many different businesses.

Business Trends That Strategies Must Consider

Formulating a Strategy

A strategist must first understand how each of the five competitive forces influence the industry as a whole, as well as how they affect the individual business. After looking intently at these forces, the strategist will then perform a strength and weakness analysis of the business to fully understand the company’s position.

The business strategy can then be formulated, centred on the following three elements:

·         Position – Match the company’s strengths and weaknesses to the structure of the industry, positioning it where the competitive forces are weak, or, alternatively, where the company is able to successfully defend itself. By acknowledging the company’s true position, it can find its place in the industry – knowing where to confront the competition, and where to adapt or change course.

·         Become an Influence – Businesses can influence the competition by following an offensive strategy. By heavily investing in a new production facility for example, a business will raise the barrier to entry into the industry.

·         Anticipate Changes – As business evolves, new trends appear. A good business strategy should include trends and forecasts, so that the business can anticipate changes to the industry and the competitive landscape.

Nilesh Waghela - Understanding Strategy