Understanding Porter's Five Forces
Porter’s Five Forces is an approach to analyze the industry, considering the likelihood that the industry will be profitable by examining five different forces:
- Power of suppliers: Whether suppliers can capture the value created by pushing up the prices of inputs
- Power of buyers: Whether the value of the industry is captured by buyers who can push down the prices that they pay
- Threat of entrants: Whether new entrants are able to easily enter the industry, in turn resulting in greater competition
- Threat of substitutes: Whether there are other products outside of the industry that competes with your industry’s products
- Inter-industry rivalry: Competition between firms in the industry that may lead to reduced industry profits
Understanding Porter's Generic Strategies
In comparison, Porter’s Generic strategies consider different approaches to compete in a particular industry. The generic strategies:
- Cost leadership, with a broad market
- A differentiation strategy, with a broad market
- A focus strategy, serving a narrow market (which can be split further into a focused cost leader, and a focused differentiation).
Industry analysis vs different approaches to competing in an industry
The key difference between the Five Forces and the Generic Strategies Frameworks are that the five forces framework is seeking to analyze industry profitability, while the generic strategies framework is seeking to explain different approaches to competing in an industry.