- Milly Barker
- May 14
- 8 min read
Updated: 4 days ago
Welcome to a new series of articles that I'm calling "Strategy Spotlight" because I love alliteration. Also Strategy. I love that most of all.
Strategy Spotlight is a fortnightly series that's going to help to demystify popular business strategy methodologies for early-stage founders and operators like you so you can decide which one works best for you and your business.
There are so many different ways to think about planning and achieving your goals for your business (including my own methodology) and it's overwhelming enough to think about getting all that done without first also having to think about which framework you're using before you can even start.
Thankfully, I've got your back.
Over the next six weeks, we'll continue to unpack the essentials of five powerful frameworks for company design:
Porter's Five Forces (this article)
Agile, and
Six Sigma
In each instalment, I'll dive deep into the origins of these methodologies, outline five key strengths and weaknesses for their application in a startup environment, and offer my perspective on their suitability for businesses of different sizes. Most importantly, I'll provide ten practical questions you can ask yourself to determine if a particular approach is the right fit for your unique company.
The goal is to cut through the jargon and provide you with actionable insights, so that you can make informed strategic decisions, reduce overwhelm, and build a stronger, more resilient business. Let's dive in.
What is Michael Porter's Five Forces?
The business world as a bit of a battlefield. Everyone's trying to get ahead, to capture market share, and generally come out on top, whatever that top looks like.
Back in the late 1970s and early 1980s, Michael E. Porter, a consultant and Harvard Business School professor, came up with a framework to help businesses understand just what sort of battle they were in.
Called the 'Five Forces', the core concepts of the framework are laid it all out in a classic HBR article (possibly my most-visited webpage, second only to House and Garden magazine where I go to get a soothing break from the world) and in a large part of one of Porter's books "The Competitive Strategy: Techniques for Analyzing Industries and Competitors".
Porter argued that the attractiveness of an industry (how profitable it is likely to be) isn't just down to the number of competitors you've got. Instead, it's shaped by five 'competitive' forces. Understanding these forces allows you to understand how to position your business for success, carve out a competitive advantage, and ultimately, not get completely destroyed in the process.
These five forces are:
Threat of new entrants
How easy is it for new companies to rock up to the market and start doing what you're doing? If the barriers to entry are low (not much capital needed, easy access to technology, not many regulations), you could see a lot of new businesses coming into the fray - particularly as you start to gain attention.
Bargaining power of suppliers
How much clout do the companies who provide you with your raw materials, components, or underlying services have? If there aren't many suppliers, or if what they offer is crucial and hard to switch from, they can really dictate terms and squeeze your profit. Unless you're running a very specific Strategy, it's pointless to win the market competition if you've spent all your winnings before they're yours.
Bargaining power of buyers
How much say-so do your customers have? If there are tons of suppliers offering similar things, or if your customers buy in bulk, they can often demand lower prices or better deals, again impacting your profitability, even if you're pushing for a value-based differentiation strategy.
Threat of substitute products or services
Are there other ways your customers could get their needs met, even if it's not exactly the same as what you offer? For example, are streaming services a substitute for buying your DVDs? The more readily available, attractive, and embedded into existing consumer behaviour substitutes are, the more pressure you're under.
Intensity of competitive rivalry
How fierce is the competition amongst the companies already operating in your industry? Is it riddled with price wars and constant innovation battles? High rivalry can really eat into everyone's margins, particularly when you're in a race-to-the-bottom pricing war.
By getting your head around these five forces, Porter believes (and, honestly, I tend to agree) that you can get a much clearer picture of how attractive your industry is and, more importantly, figure out how your business can strategically position itself to not just survive, but thrive.
Understand these forces, and you can focus on finding ways to lessen the impact of the negative once and exploit any advantages you might have.
Why might Porter's Five Forces be GOOD for startups?
Early market insight
Conducting a five forces analysis early on can provide founders with a structured understanding of the competitive landscape before significant resources are committed, and the company finds itself too far down the path of crucial decisions about market entry and target segments.
Identification of opportunities
By examining the intensity of each force, startups might uncover less competitive niches or areas where existing players are vulnerable, which can guide the development of a value prop that's actually differentiated.
Strategic positioning
The framework can be a great way to gain an understanding the pressures a startup will face. It's a very Charlie Munger-esque approach, which allows for the development of strategies to mitigate threats in advance and leverage potential advantages in pricing, distribution, and product differentiation from day one.
Competitive advantage development
A clear grasp of the five forces can inform the creation of a USP that addresses competitive pressures and offers distinct value to customers from the very earliest days. It can be a lot more efficient to announce yourself to the world as different/better at the start, than to announce yourself and they have to say 'Also, we're soooo unique' when potential customers have already formed an impression of your brand.
Enhanced investor communication
Demonstrating an understanding of the industry's competitive dynamics through a five forces analysis can strengthen a startup's pitch to investors. Showcasing strategic awareness should not be under-estimated as a tool for driving investment conversations forward. The investor is going to have to do that analysis anyway - do it for them an you control the earliest perceptions of how your business is a vehicle to make their money into more money.
Why might Porter's Five Forces be BAD or less relevant for earlier-stage startups?
Caveat you should know before reading these - I'm being as objective as I can be - which you might find to be 'not very objective' because I do quite like this framework and I use it with my earlier stage clients as well as later stage ones. Read on with an understanding that I'm just a deeply biased and flawed human doing her best.
Focus on existing industries
The model is primarily designed for analysing established industries. Not a criticism in itself, but truly novel startups creating new markets may find the framework less directly applicable due to the absence of established competitors. Probably also for a problem for the 'substitutes' force, but, TBH, that's not strictly true - Uber's substitutes were 'all other ways to travel locally', which is quite a significant substitute pool for a really novel way of looking at the world.
Static analysis
The five forces provide a snapshot of the competitive landscape at a specific point in time, like a strategic version of a balance sheet. The dynamic nature of early-stage markets and rapid technological change may render that analysis outdated pretty quickly, but, honestly, that's answered by just always making sure you have an eye on the market - something you should be doing relentlessly, regardless of which planning methodologies and frameworks you're employing.
Data acquisition challenges
A comprehensive five forces analysis requires significant data on competitors, suppliers, and buyers, which can be difficult for resource-constrained startups to gather, particularly in nascent markets. I'd encourage anyone thinking 'this sounds like a lot of work' to remind themselves that 'yeah, startups are hard, they're not meant to be easy' and to look to freelance/fractional service providers for data-gathering.
External focus
This one is maybe not comparing apples to oranges, but it's worth considering the fact that the framework primarily examines external competitive pressures and it offers limited direct guidance on internal operational (in)efficiencies or product development strategies. I'm a COO, so obviously I'm going to tell you that internal operational efficiencies are incredibly important, but I also don't think that the framework is claiming to be both internal and external - it's a part of assessing your market viability, not all of it.
Risk of analysis paralysis
While valuable, an overly extensive analysis without any timely action can really hinder the speed and agility of a company. Consider this one in conjunction with point two - you can't spend so long assessing your position that you don't act before the position changes - that's not 'setting up a business' that's 'an outdates research project' - unless you're in academia, the latter isn't generating you money.
Who is Porter's Five Forces BEST for?
Mate, honestly, it's good for everyone.
While a deep dive into all five forces might feel like a weighty task best suited to larger, more established entities with dedicated strategy teams, it can't be denied that its fundamental principles offer valuable early insights for startups too.
Understanding the basic competitive dynamics of your chosen market - even in a simplified way - can inform really crucial early decisions about market entry, target audience, and differentiation.
For very nascent startups focused on proving their core concept, a full-blown, data-intensive analysis might be a bit premature (if you're doing it before you've asked your customers if they care enough about the problem to give you money to fix it for them, then you're definitely premature). However, as a startup's form begins to solidify and the team starts to think about scaling, that's when a more formal application of Porter's framework becomes more relevant.
Porter's Five Forces can be a great way to structure a really a crucial external perspective that complements internal analyses like the Lean Startup's customer validation or EOS's operational structuring (it also, of course, plays well with my own framework).
Ultimately, a pragmatic and appropriately sized application of Porter's Five Forces has the potential to be an asset at various stages of a company's growth, but its importance and depth of application tend to grow in tandem with the startup's maturity and the increasing complexity of its competitive environment - i.e. use it well and wisely.
How can I decide if Porter's Five Forces analysis is right for ME?
Ok, now you're clear on what Porter's Five Forces is from a general perspective, let's figure out if it's right for you and your specific circumstances.
Here are ten questions to ask yourself to figure out if Porter's Five Forces is the right methodology for you:
Have you got a decent handle on who your main competitors are and what they're up to?
Are you starting to think seriously about how to carve out a unique spot for yourself in the market?
Are you about to make some big strategic calls about your pricing, how you sell your products or services, or what new things you should be developing?
Are you finding that suppliers or customers seem to have a fair bit of sway over your business?
Is the threat of new companies muscling in on your patch something you're actively worried about?
Could there be other, perhaps unexpected, ways that customers could get their needs met instead of using your product or service?
Are you trying to get investment and want to show you've got a proper grip on the competitive landscape?
Are you entering a market that already has a fair few established players?
Do you have the time and resources to properly research your industry and gather information on competitors, suppliers, and buyers?
Do you reckon a better understanding of the external competitive pressures could help you make smarter long-term decisions for your business?
If you can answer 'YES' to a lot of these, then Porter's Five Forces might be a great fit for you.
Take the time to answer these questions honestly. Your answers will give you a good indication of whether Porter's Five Forces is the strategic sidekick your early-stage business needs.
If you're struggling to answer any of them, or want any additional help, just give me a shout:
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