Porter's 5 Forces vs. SWOT Analysis: An Overview

Porter's 5 Forces and SWOT analysis are both tools used to analyze and make strategic decisions. Companies, analysts, and investors use Porter's 5 Forces to analyze the competitive environment within an industry, while they tend to use a SWOT analysis to look more deeply within an organization to analyze its internal potential. 

Each of the models seeks to define the company's position in the market. Porter's 5 Forces are generally more of a micro tool, while SWOT analysis is comparatively macro.

Porter's 5 Forces

Porter's 5 Forces is a comparative analysis strategy. Companies can use it to determine competition within their industry, along with an industry's weaknesses and strengths. This model can be applied to any segment of the economy to search for profitability and attractiveness.

The strategy was devised by Harvard Business School professor Michael E. Porter as part of his book Competitive Strategy: Techniques for Analyzing Industries and Competitors, which was published in 1980. It can be used to analyze a company's industry structure as well as its corporate strategy. By using Porter's 5 Forces, companies can set expectations of profitability.

The Key Components of Porter's 5 Forces

Porter's 5 Forces outlines five key competitive forces that make up every industry including:

1. The potential for new entrants into the industry. When the entry is easy for new companies, it means there is usually a higher degree of competition.
2. Existing competition in the industry. More established rivals mean a high level of competition in the industry.
3. The arrival of new goods or services on the market. Newer products and services can erode those that are already established.
4. Supplier power. When more suppliers begin to bargain, it may lead to scarcity. This may drum up competition for raw materials and other resources, leading to an increase in costs and a cut into a company's profits.
5. Consumer power. Consumers who have more power to bargain can lead to a drop in profitability.

Each of these forces is generally external in nature and is not the result of a company's internal structure. The forces are generally analyzed against a micro concept such as an individual business line or idea.

SWOT Analysis

SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis is a strategic tool used to shape the success of a business, place, industry, product, or person. It tells an entity what it can and cannot do both internally and externally, outlining how it can accomplish its goals and what stands in its way to achieving them.

Each piece of a SWOT analysis is used as one element of comparison to existing solutions and competitors. The focus, however, remains on the internal fortitude of the concept. The SWOT analysis is often considered a more macro review, as it can give a sense of whether an objective is attainable. Users often go through a SWOT exercise simply to identify their own competitive advantages and disadvantages.

Internal Factors

The strengths and weaknesses are internal characteristics—ones that can be controlled and/or changed, often easily, and from the inside. The strengths outline how the entity excels and exceeds its competition. This may include forces like location, brand power, marketing, cash on hand, technology, or pricing. An entity's weaknesses, on the other hand, prevent it from performing to its fullest potential. Debt, lack of capital, workforce turnover, and a lack of resources are all examples of weaknesses.

External Factors

External factors include opportunities and threats, which may not necessarily be easy to contain. The opportunities an entity has are the favorable factors, which give it an edge over its competition within the industry. Tax cuts and reform are an example. Threats, on the other hand, are external factors that can hinder a company's competitive advantage. A weaker labor force and higher costs for raw materials may be potential threats.

Special Considerations

Businesses can adjust their strategies by understanding and using Porter's 5 Forces. Using these can help trigger higher profits and, therefore, boost earnings for their investors. Analysts and individual investors can also use Porter's 5 Forces as a qualitative tool when performing a stock analysis prior to investment.

A SWOT analysis can come in the form of brainstorming or self-assessment activities. In order for a SWOT analysis to work, there must be an open atmosphere, where everyone is allowed to contribute with their own ideas. After this is done, a company's management (or an individual) can work on analyzing each idea and put a strategic plan into place to help achieve success.