How to Apply Porter's Five Forces to an Industry

The five forces are run in order, beginning with a written statement of the field and of which side the run stands on. Buyer power and supplier power change places the moment that sentence is missing. Then rivalry, new entrants, substitutes, buyers and suppliers are taken one at a time, and a reading is recorded only where a published fact supports it. On the field that Anjani Stationers, an invented maker of registers, sells into, two of five stand.

Each of the five forces is set out separately, under its own name: rivalry, how easily a new seller could set up, what a buyer could turn to instead, who holds the terms on the buying side and who holds them on the input side. Standing the five on one field together, in order, with a result at the end, is a different job, and the job takes each of the five as already understood.

The five are read from a position and never from above, so the first step is not one of the five. The frame asks what a field lets a seller inside it earn. Buyer power and supplier power are the same question asked at the two ends of one trade, so which of the two a given fact answers depends entirely on which side of the trade the run stands on. The side is settled in writing before anything at all is pulled.

Every step has to be runnable on a fact somebody actually holds, or it is not a step. Each one names what to pull, what a pass looks like, what a fail looks like, and what the fail then makes the next step do. On the field run below, three of the five come back not establishedThe written result for a line where the run went looking and found no fact that met the condition. The result is a finding about the evidence, not a shrug, and it is written out in words so a later reader can tell it apart from a line nobody got to., and a step that can come back not established is doing the work of a test. One that only ever comes back yes is a prompt wearing a step's number.

The output is five readings and a count, never a score. Nothing in the frame says how to weigh one force against another, and nothing published anywhere supplies a weight. So the five readings sit side by side and get reported side by side. A run that adds them has invented a unit. A run that averages them has invented two.

Where does this frame come from, and what is it for?

Michael Porter set the five forces out in Competitive Strategy in 1980. The frame asks one question about a field, and it is worth stating in the plainest form available: what does this field let a seller inside it earn? Not how well any business in it is run, not which of them is growing, and not what any of them is worth.

All five are read against one field at once, and the reading is a sequence. Everything below is order: which step comes first, what each step pulls, and what a fail at one step makes the next step do. The steps take the five accounts of the forces as given.

Step one: what is the field, and which side does the run stand on?

Nothing is pulled at this step. Two things get written down and only two: what is sold and to whom, and which sellers' position is the question. The sentence takes about forty seconds to write, and skipping it is the single most expensive thing that can happen to a run.

Here is the sentence this run was started with. The field is hard-bound registers made to a school specificationA written sheet setting out exactly what has to be made: the size, the paper weight, the binding, the cover, the number of leaves. Two makers building to one of these are turning out goods a buyer treats as one and the same. and sold to schools and institutions in one city, and the run stands with the makers. One sentence is all of it. Written out, it settles three things at once: Anjani Stationers Private Limited is a seller inside the boundary, the schools are its buyers, and the paper mills are its suppliers.

A frame read from no stated position has five lines and no meaning. Every one of the five readings below is counted against that boundary and read from that side. A run started without them does not come out vague. The run comes out internally consistent, fully evidenced and pointed at something nobody asked about. A wrong answer with every fact in place is far harder to catch than a vague one.

Away from any business first. Before an argument about whether the corner shop faces competition can go anywhere, somebody has to say whether the shops on this street or every shop in the city is meant. The answer changes with the sentence and not with the shops, and two people who never write the sentence down can argue for an hour without discovering they were describing different places.

Herfindahl-Hirschman Index: Which Market Are You Measuring? takes up how much a boundary decides, and what moving one does to a measure of a field.

Step two: how do the sellers already inside behave towards each other?

Step two asks for one thing, and the thing is a behaviour rather than a headcount. The fact wanted is how the sellers already in the field act towards each other on whatever a buyer actually chooses on.

One other maker is named. Bhavani Register Works is promoter runThe people who founded the business are also the people running it day to day, with their own money in it. Nobody outside has put a manager over them. and makes 1,50,000 registers a year to the same specification, against Anjani Stationers' 2,50,000. Nothing anywhere gives what Bhavani Register Works charges, what it pays for paper, or what its works costs to run. Nothing published anywhere states how many makers the city holds. So there is no fact at all about how the two behave towards each other, and the line is recorded as not established.

A rival existing is not a reading of rivalry. One says somebody else is in the trade. The other says what that has done to anybody's prices or terms, and only the second is what this step asked for.

The two output figures invite a sum. The sum is not available. Nobody has published how many makers the city holds, so 2,50,000 and 1,50,000 are two makers' outputs and not a split of anything. No share, no total, no ranking and no index can be built from them, here or in any note built on them.

Counting the sellers in a field, and reading how bunched they are, belongs to Consolidation and Fragmentation: How an Industry Concentrates, and What Thin Returns Look Like. Competitive Rivalry: How Intensity Shapes Industry Returns sets out what rivalry is and the lines it turns up in.

Step three: what would it take somebody to start selling here?

Step three is about arrival, not about anybody already inside. Two kinds of fact answer it: something about the cost of setting up, or something about somebody who actually turned up or actually left.

Nothing anywhere states what a register works costs to build or to buy, and no arrival or departure is recorded. So the line is carried as not established, and it stays a line rather than disappearing.

Now name the temptation, the one most readers reach for, and the one that looks entirely reasonable. Anjani Stationers' own standing cost base and its rated works are both published figures. Reaching for them here says what it cost this business to get where it is. The step asked what it would cost somebody to start. The two questions have two different answers, and the published figures answer only the first.

An incumbent's balance is not a newcomer's bill. What one business carries today is the outcome of years of its own decisions, taken at prices that were current when it took them.

Away from any business again: the rent a neighbour pays on a shop she took over twelve years ago says very little about the rent quoted this week for the empty unit next door. Both are rents. Only one of them is the number a newcomer would face.

The Sources of Competitive Advantage carries a named section on how easily a new seller could set up, and on what actually stands in the way.

Step four: what could a buyer turn to outside the trade altogether?

The word outside is doing all the work in this step. The step looks for something not in this trade at all, and for the path the money would take to reach it.

Nothing outside the register trade is named anywhere as something a school would spend that money on instead. So the line is carried as not established, and the wording of that result matters more here than at any other step.

No substitute was found and no substitute exists are different sentences, and only one of them is supported here. The run looked and came back with nothing. The first sentence is a statement about what has been published, and it leaves the second entirely unwritten.

Take it out of the trade for a moment. If every barber in the lane raised the rate on the same morning, some of that money would go somewhere: to a longer gap between haircuts, to a pair of clippers bought once, to a barber two lanes over. Naming where, and following the money to it, is the whole of this step.

Substitutes: The Competition That Is Not in the Industry sets out what a substitute is, and why some businesses meet fewer of them than others do.

Step five: who holds the terms on the buying side?

Two facts are wanted here, and both have to arrive. One describes the shape of a list, and the other describes what happened in a negotiation.

The Sunrise Public School group takes 30.00 per cent of Anjani Stationers' revenue and holds 40.00 per cent of the money still owed to it, a gap of ten points. The group collects in 171.23 days against 110.08 days for everyone else on the book. A share and a term are both named, so the step passes and the reading is that this buyer holds the terms.

The step passes on one named buyer, and the reading stops at that name. Nothing published describes how schools in general buy from makers in general, so this line supports a statement about the Sunrise Public School group and supports nothing at all about the field's buyers as a group.

The shape of this is familiar from a household. The one relative who always pays back eventually, and always six weeks after everybody else, is not a large exposure because of the amount. The relative is a large exposure because of what has quietly become normal.

How to Analyse Customer Concentration and Dependence takes a customer list apart line by line. Buyer Power: When Customers Set the Terms sets out what buyer power is and where it arises.

Step six: who holds the terms on the input side?

Three facts are wanted for each input, and the third one is the one that gets left off tables: what it is, how many places it could come from, and how long a change would take.

Anjani Stationers is a seller in this field, so its six counterpartiesWhoever a business has an arrangement with, seen from the business's own side of it. The word ranks nothing: the smallest name on a payment list is every bit as much one as the largest. are the field's input side. The paper mill takes 46.0 per cent of what the business pays out, has nine known alternatives and a two week replacement timeHow long it would take to have a different supplier actually delivering, counted from the decision to switch. A replacement time is a waiting period, not a price, and it is what a business is stuck with while the change happens.. The machine servicing contractor takes 4.0 per cent, has one known alternative and a twenty six week replacement time. The step passes, and the reading is that the input side holds the terms at one place, and not at the largest one.

The step states the two figures and the reading, and then stops. Why a share of spending and a replacement time are independent properties, and which of them decides a dependency, is argued in full under Supplier Power: When Inputs Set the Terms.

Now the temptation the whole procedure exists to prevent, and it lands exactly here. The paper market has facts of its own that are far more quotable than anything above: nine mills inside reach turning out one weight and one finish, with a quote back inside the day. Nine mills and a same-day quote are facts about how sellers in a different field behave towards each other. Putting them on the rivalry line of this run would be answering step two from the wrong side of the trade.

Step seven: what do the five readings say when they are put in one place?

Nothing new is pulled at the last step. The five readings come together in order, each one carrying the fact it rests on, and then they are counted.

Here is the whole run, with every component printed so that any line of it can be rebuilt from the source it came from.

A run that returns five answers on a field like this one has invented three of them. Three lines went looking and came back with nothing, and writing the words out is what keeps them from reading as lines nobody got to.

The count is the verdict, and it says two things at once. First, nothing published settles what this field lets a maker earn. Second, the two readings that do stand each concern one named party rather than the field as a whole, so neither can be stretched into a sentence about schools in general or about suppliers in general.

What comes out of a finished run, and what can never come out of one?

A finished run produces seven lines: a stated field, a stated side, and five readings of which two stand. Seven lines are the entire output, and they fit on one card.

The list of what a run cannot supply is longer, and a run that quietly supplies any item on it has stopped reading and started deciding. Nothing supplies a weight to add five readings with, so there is no score. Two readings and three blanks do not average into one, so there is no single word for the field. There is no view about whether the field is a good one to be in, no price on anything, and no statement about what any business should do next.

The run reads what is there, and every one of those refused outputs needs something that is not.

How would somebody run this at a desk next Monday?

The whole run fits on one card, and the card arrives already filled in rather than blank. A blank card is exactly what turns into a list of headings with paragraphs under them.