There are two primary components of strategic analysis used by most organizations. The first is called five-forces analysis, and it is a tool that organizations use to analyze the external competitive environment. Five-forces analysis is again brought to us by Michael Porter, who identified competition within an industry as being a composite of five competitive forces that should be considered in analyzing competitive situations.

Rivalry among competitors. Porter calls this scrambling and jockeying for position. Businesses do this in different ways, including competing for customers on the basis of price, quality, or speed of delivery. Threat of substitute products and services. Companies in other industries may try to take a company’s customers away.

Potential new entrants. In many industries today, all it takes to enter is the ability to create and host a website. Power of suppliers. If the business has only one major supplier of a critical component, with no alternatives available, then the supplier has greater bargaining power over the business. Power of buyers. How much does our business depend on its buyers? If one buyer or a few large buyers purchase most of what we provide, then the buyer has significant bargaining power over our company.

Companies use the five-forces analysis and other industry and competitive situation analysis tools primarily at the corporate level to make decisions regarding which lines of business to enter and exit and how to allocate resources among existing lines of business.

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