The 5 Forces Every Product Manager Should Know
PMs are expected to write product strategies. And, yet, 99% don’t even understand Porter’s 5 Forces of strategy.
The concept is considered “revolutionary” in the field of strategy.
The idea of the 5 Forces is that competition is looked at too narrowly by (product) managers. Yes, you are competing with your direct competitors. But, you are also in a broader fight for profits with a large ecosystem of players.
This fight is with:
- Substitutes who can replace your product
- Customers who decide their willingness to pay for your product
- Suppliers who set the prices of inputs to your product
- New entrants who might steal some share
They represent the other four forces.
Let’s analyze airlines with the framework:
- There are numerous airlines
- Substitutes include car, train & bus
- Customers don’t fly when it’s expensive
- Supply is a duopoly
- New entrants can lease a plane & gate easily
All 5 forces are strong, hence profitability is terrible.
Compare this to soft drinks:
- Basically just 2 firms competing
- Substitutes are numerous
- Customers are addicted
- Unique ingredients make supply bargaining power very low
- Entering restaurants and supermarkets is very hard
Only 1 force is strong, so they mint money.
Now that you can do the analysis, how do you use the 5 forces to improve your product strategy?
First, analyse how competitive your industry is.
If your industry is too competitive, consider not competing. Instead, grow the pie. Slightly redefine the problem you solve.
This is what happened with Virgin Airlines, for instance. Instead of competing directly, the company slightly redefined the problem. It created cool planes. As Richard Branson said, “we wanted to make it feel like a club on the plane.”
Second, analyse why profitability is possible in the industry.
If it’s because customers do not have much power to set the price, consider further increasing your price. If it’s because suppliers do not have bargaining power, negotiate a lower price. If it’s because substitutes are weak, enter their markets. If it’s because new entrants are unlikely, do not focus on building a moat against them.
For instance, with soda, its suppliers have little bargaining power. So, Coke and Pepsi negotiate very cheap input costs. Product-wise, customers are addicted. So they create slight variations, like Pepsi Max and Diet Coke.
In summary
5 Forces analysis helps you step out of daily execution to evaluate the broader context as a PM. Should you compete directly? Should you focus on a single force? If you can conduct Porter’s 5 Forces while developing your product strategy, it will be stronger.
