Porter Five Forces Model and SWOT, both are analytical techniques applied by businesses to carry out strategic decision making. Both of these models define the position of the company in the market. Although both of these analyses attempt to explain the company’s weaknesses and strengths relative to the opportunities and the challenges in the industry, the key difference is that the Five Forces Model is applied to study the competitive industrial environment with prime focus on outside factors, while SWOT analysis is more oriented towards the internal conditions of the organization to analyze the internal potential of the organization.
SWOT (Strengths, Weaknesses, Opportunities and Threats) is a very basic analysis of current potential of a company based on the weaknesses and strengths it possesses and also the opportunities and threats the company is facing. A SWOT analysis is usually done with the help of a table that has four boxes. Starting from strengths in the top left, we describe weaknesses, opportunities and threats in a two by two table in a clockwise manner.
The strengths and the weaknesses are analyzed with reference to the company’s competitors. Opportunities and threats, on the other hand, require futuristic approach and thinking to jolt down any upcoming opportunities and threats the company needs to prepare for while it still has time in order to maximize opportunities and minimize threats.
Porter Five Forces Model includes an analysis of five forces that have a direct impact on a company and its position within the industry. These five factors include suppliers bargaining power, buyers bargaining power, the threat of substitutes, the threat of potential new entrants and the competitive rivalry in the same industry. Five forces model can be used to determine the competitive advantage a company has in each of the five areas of the model. E.g. for a product reseller, it is very important to be aware of the bargaining power you have with the industries suppliers and buyers. Five forces model analysis can also help you understand what the substitute to the product or service you offer are and who offers those substitutes. Similarly, analysis can be done to determine how easily a new competitor can enter into your industry and who your direct rival competitors are currently in the industry. The level of competition has a direct effect on the opportunities available for a company.
One very basic distinction between the two analyses is that SWOT is more of a general, broad-based assessment of the internal conditions of a company while Five Forces Model is more directed towards a sole growth decision. A company may begin its analysis with SWOT to draw a image of the current situation of the company in the marketplace and then focus on the future strategic opportunities. Then, Five Forces Model can be used to analyze the feasibility of a particular service, product or industry expansion (Kokemuller, 2007). For example, Five Forces Model can be used to decide on a product diversification into a particular product category.
SWOT is more about a company’s business and its situation while Five Forces Model is a tool used to analyze the competitors and what and how their actions can impact your survival. Generally, best opportunities for a company exist in a situation where the company’s strengths in relation to its competition are more aligned with its opportunities and less threatening competitive forces. Another difference between the two is the time orientation. It is slightly different for both the analysis. For SWOT, it is the assessment of a company’s current position and future prospects while Five Force is mostly centered on future decisions using the analysis of its competitors or other forces that are able to directly impact it (Investopedia, 2015).
One more difference is that SWOT is a comparatively macro-analysis tool as it gives a sense if an objective is achievable or not while Five Forces is a more of a micro analysis tool of the environment. Thus, both of these tools are very important for any company to survive in an industry or in any particular environment.
References
Investopedia, 2015. What’s the difference between Porter’s 5 forces and SWOT analysis? [Online] Available at: http://www.investopedia.com/ask/answers/041015/whats-difference-between-porters-5-forces-and-swot-analysis.asp [Accessed 5 June 2017].
Kokemuller, N., 2007. What Is the Difference Between a SWOT and a Five-Forces Analysis? [Online] Available at: http://smallbusiness.chron.com/difference-between-swot-fiveforces-analysis-78277.html [Accessed 5 June 2017].