The Five-Forces Model

When we begin work with M&A clients on their Growth Program Review we normally use Michael Porter’s model, the Five-Forces Analysis.  This shows the five key forces acting on a company’s destiny: Competitors, Customers, New Entrants, Substitutes and Suppliers.

5forcesmodel1This model invites you to look at the pressures on your business from several key perspectives, and provides a tool both for diagnosis and prescription. What I like is that it pushes you to see beyond competition, where most business owners tend to get fixated.

I recall a client in the financial software industry whose entire strategy comprised a breathless reaction to what his competitors were doing. If they added a new function to their application, he set his team to work making a better version of the same upgrade. If his competitors broke into a new geographical market, he dispatched his sales team to set up office there. It was the ultimate “me too but me better” approach. Not a very robust recipe for growth.

The Five Forces model gets you asking a different set of questions, about for example how changes in supply might affect your business, or what barriers face new entrants to the market, or where new technologies might displace your current offering.

To my mind, by far the most important element in Porter’s model is “Customers” because this is the key to future demand. In fact, my one quarrel with Porter is that he positions this element to one side and places Competition in the center. I usually reconfigure it to make Customers — that is, future demand — the centerpiece of the diagram in place of Competitors.

Possibly the single most important shift in thinking Capstone brings to clients lies exactly here. We pull their attention away from their competition and on to their market. Together, we break the spell of the present and lift our eyes to the future.