Porter’s Five Forces is a framework for understanding power in an industry. It systematically considers 5 Forces that help explain whether an industry is likely to be highly profitable, able to capture the value that it creates, or whether the value is captured by others.
Porter’s Five Forces systematically considers whether the value will be captured by i) powerful customers (buyer power), ii) powerful suppliers (supplier power), competed away through iii) new entrants (threat of new entrants), iv) substitute products (threat of substitutes), or v) intense rivalry within an industry (industry rivalry).
Why is Porter's Five Forces important for startups?
Will you be able to make money? Is the industry even worth entering?
The real power of Porter’s Five Forces is that it helps explain the industry profitability – if the economics are aligned against you, your firm is going to have a very hard time competing unless it is able to in some ways work out a way of avoiding the forces.
In many ways, Porter’s Five Forces is most important for startups – while incumbent firms are already in the industry (and in turn somewhat constrained by whatever the forces may be), as a startup you have the option of simply not entering the setting. If your analysis reveals that the industry is likely to be unprofitable (or become unprofitable over time), you can either walk away or potentially consider approaches that will not make you as susceptible to the intense competition of an industry.
Will you face greater competition over time?
Another important question that Porter’s Five Forces raises is whether your firm is going to face greater competition over time. There may for example be an industry that starts off profitable, but if other firms are able to easily enter the industry, that profitability will likely decline over time.
Can you neutralizing industry entry barriers?
If the industry that you are attempting to enter has high entry barriers, it is important to consider whether there are approaches that you can take to sidestep or neutralize these barriers.
Often industries that are very profitable are profitable because of the entry barriers – this is great for incumbent firms, but as a new company, these barriers may pose substantial difficulties in allowing you to enter.
If for example, brand awareness is important for incumbent firms (and connected high advertising spends), think if there are ways of achieving brand awareness without incurring the high costs traditionally associated (e.g., guerrilla marketing). Similarly, if access to distribution channels is a key barrier, think if there are ways of sidestepping this – potentially selling your goods online or via social media.