Aurore

Five Forces:
Ford

Today, we’ll use the Five Forces tool to analyze the forces that impact Ford Motor Company in the North American automotive market.  The Five Forces framework is a valuable tool for companies that want to launch a new product or enter a new market.

What are the five forces?

Created by Michael Porter in 1979, the goal of the Five Forces framework is to analyze the impact the sources of competitive pressure have on the marketplace. The result, ultimately, is to determine the level of attractiveness for government independent industries and markets. 

Market attractiveness is a product of two closely related things: the fierceness of competition within the market, and the potential profitability in the market. Typically, the market profitability potential is a function of the fierceness of competition. The more fierce, the lower the profitability.

In this framework, the process is to analyze the five forces by independently evaluating the factors inside each force. After completing the evaluations, the results on the dashboard quantify the threat of the market and provide a snapshot of the forces that have the highest impact and highest threat.

Illustration by Adam Nickel

Step One:
Define the Market

What is the market category and geography?

To frame our thinking, we begin by clearly defining the market category and geography. The market category is the space you’ll compete in. The geography is the area where competition is and products are sold.

Ford example:

Ford participates in the global automotive market. To tighten our analysis, we’ll focus on North America specifically, rather than the broad global market. 

Step Two:
New Entrants

What is the New Entrant Force?

The threat of new entrants is a measure of the ease in which companies can enter the market. In every market, there are barriers to entry. The lower the barriers to entry, the more easily companies can enter, thus having higher threat to existing companies in the market.

For this tool, we are making evaluations as an existing competitor in the market!

Ford example:

In the North American automotive marketplace, the threat of new entrants is relatively low for existing competitors.  The percentage of market share at risk to new entrants is very little since the market is in its later stages. Additionally, the cost of switching to a new entrant is relatively high for this industry.

Step Three:
Competitors

What is the Competitive rivalry Force?

Competitive rivalry is a measure of the pressure that existing players place on each other by competing for profitability in the market. If competition is fierce, you and your rivals will fight for market share. In these cases, more resources and investments are required to compete in the market, so the profitability potential decreases.

Ford example:

In the automotive marketplace, competitive rivalry is a moderate threat to profitability. The market is highly concentrated, has slow growth, and requires a strong brand to compete.

Step four:
Suppliers

What is the Suppliers Force?

Supplier bargaining power is a measure of the amount of pressure that suppliers are able to put on you and your rivals. If suppliers are unable to raise prices, lower their quality, or reduce the availability of their products, then their power shrinks and the potential for profitability increases for you and your rivals.

Ford example:

In this example, the threat of suppliers is moderate.  This is mostly due to the high switching costs. On the other hand, the likelihood that a supplier could become a player in the automotive industry is extremely low. So, there are factors that enable suppliers to have more power, and some that diminish their power.

Step five:
Substitutes

What is the Substitutes Force?

The threat of substitutes is a measure of the availability of an alternative product that meets some of the same benefits as the current product.

Often, substitutes are unintended solutions from adjacent industries that replace the current solution. As an example, think about how cell phones became substitutes for wristwatches.

Ford example:

In this example, substitutes pose a very low threat to the market. This is mostly due to the fact that the substitutes are very different from the current solution. As an example, substitutes for an automobile might include a bike or walking as an alternative. In these cases, the substitute solution has very different implications than the current solution.

Step six:
Buyers

What is the Buyers Force?

Buyer bargaining power is a measure of the amount of pressure that your customers can place on you and your rivals. If customers have a lot of bargaining power, the potential for profit decreases.

Ford example:

In the automotive marketplace, the threat of buyers is low. This is because the market has many buyers, and those buyers don’t have much power to create their own solutions. 

Step Seven:
Priority Ranking

Which forces have the highest impact on profitability in the market?

In this step, rank the impact that each force has on the potential profitability in the market. This adds a second dimension to our five forces evaluation, so that we can prioritize the forces that are the highest threat and have the highest potential impact on the marketplace.

Ford example:

For the automotive marketplace, the competitive rivalry has the highest impact on profitability. Buyer bargaining power has the second highest impact, followed by suppliers and new entrants, respectively. Lastly, the power of substitutes poses the lowest impact.

Dashboard:
Market Threat Analysis

Market Threat Bar

The market threat bar displays the combined score of the five forces. The higher the threat score, the more potential negative impact to profitability.

Remember, we completed these evaluations from the perspective of an existing competitor in the market. So, when the threat is high, the current players in the market will have a more difficult time maintaining their profitability, and new entrants will have an easier time penetrating the market.

Ford example:

The overall threat score is fairly low for the automotive market.

To the right is a list of market dynamics. It highlights the current stage of the lifecycle for the industry, growth rate, barriers to entry, and more. Use this information to better understand your market.

The 4-Boxer

The 4-boxer is a measure of the forces with the highest threat level and the highest impact to profitability. The top-right quadrant houses the forces that should be the focus for increasing profitability.

Ford example:

In this case, the competitive rivalry, listed in the top-right square, is the force that is applying the most pressure on the market. Using this information, we can return to the competitive rivalry evaluations to identify the specific factors that are impacting the market the most.

What's next?

Use this tool to compare the threat levels of other markets and geographies. Which market has the lowest threat score? Which market threats can your company most easily combat? 

This tool is a starting point for guiding critical strategic thinking. Consider the unique capabilities of your business in addition to the process and results from the framework to add rigor to your decision-making process.

For more insights, consider the SWOT analysis tool to discover the actionable, most important strengths and weaknesses of your business. Learn more >

0