Five Competitive Forces (Porter)

The Five Forces model of Porter is an Outside-in business unit strategy tool that is used to make an analysis of the
attractiveness (value) of an industry structure. The Competitive Forces analysis is made by the identification of
fundamental competitive forces!
". #ntry of competitors. $o% easy or difficult is it for ne% entrants to start competing& %hich barriers do
e'ist.
(. Threat of substitutes. $o% easy can a product or service be substituted& especially made cheaper.
). *argaining po%er of buyers. $o% strong is the position of buyers. Can they %ork together in ordering
large volumes.
+. *argaining po%er of suppliers. $o% strong is the position of sellers. ,o many potential suppliers e'ist or
only fe% potential suppliers& monopoly-
. .ivalry among the e'isting players. ,oes a strong competition bet%een the e'isting players e'ist- /s one
player very dominant or are all e0ual in strength and si1e.
2ometimes a si'th competitive force is added!
3. 4overnment.
Porter5s Competitive Forces model is probably one of the most often used business strategy tools. /t has proven its
usefulness on numerous occasions. Porter5s model is particularly strong in thinking Outside-in.

Threat of 6e% #ntrants depends on!
7 #conomies of scale.
7 Capital 8 investment re0uirements.
7 Customer s%itching costs.
7 9ccess to industry distribution channels.
7 9ccess to technology.
7 *rand loyalty. 9re customers loyal-
7 The likelihood of retaliation from e'isting industry players.
7 4overnment regulations. Can ne% entrants get subsidies-
Threat of 2ubstitutes depends on!
7 :uality. /s a substitute better-
7 *uyers5 %illingness to substitute.
7 The relative price and performance of substitutes.
7 The costs of s%itching to substitutes. /s it easy to change to another product-
*argaining Po%er of 2uppliers depends on!
7 Concentration of suppliers. 9re there many buyers and fe% dominant suppliers- Compare! ;ral<ic =odel.
7 *randing. /s the brand of the supplier strong-
7 Profitability of suppliers. 9re suppliers forced to raise prices-
7 2uppliers threaten to integrate for%ard into the industry (for e'ample! brand manufacturers
threatening to set up their o%n retail outlets).
7 *uyers do not threaten to integrate back%ards into supply.
7 .ole of 0uality and service.
7 The industry is not a key customer group to the suppliers.
7 2%itching costs. /s it easy for suppliers to find ne% customers-
*argaining Po%er of *uyers depends on!
7 Concentration of buyers. 9re there a fe% dominant buyers and many sellers in the industry-
7 ,ifferentiation. 9re products standardi1ed-
7 Profitability of buyers. 9re buyers forced to be tough-
7 .ole of 0uality and service.
7 Threat of back%ard and for%ard integration into the industry.
7 2%itching costs. /s it easy for buyers to s%itch their supplier-
/ntensity of .ivalry depends on!
7 The structure of competition. .ivalry %ill be more intense if there are lots of small or e0ually si1ed
competitors> rivalry %ill be less if an industry has a clear market leader.
7 The structure of industry costs. /ndustries %ith high fi'ed costs encourage competitors to
manufacture at full capacity by cutting prices if needed.
7 ,egree of product differentiation. /ndustries %here products are commodities (e.g. steel& coal)
typically have greater rivalry.
7 2%itching costs. .ivalry is reduced %hen buyers have high s%itching costs.
7 2trategic ob<ectives. /f competitors pursue aggressive gro%th strategies& rivalry %ill be more intense. /f
competitors are merely ?milking? profits in a mature industry& the degree of rivalry is typically lo%.
7 #'it barriers. @hen barriers to leaving an industry are high& competitors tend to e'hibit greater rivalry.
2trengths of the Five Competitive Forces =odel. *enefits
7 The model is a strong tool for competitive analysis at industry level. Compare! P#2T 9nalysis
7 /t provides useful input for performing a 2@OT 9nalysis.
Aimitation of Porter5s Five Forces model
7 Care should be taken %hen using this model for the follo%ing! do not underestimate or underemphasi1e the
importance of the (e'isting) strengths of the organi1ation (/nside-out strategy). 2ee! Core Competence
7 The model %as designed for analy1ing individual business strategies. /t does not cope %ith synergies and
interdependencies %ithin the portfolio of large corporations. 2ee! Parenting 9dvantage
7 From a more theoretical perspective& the model does not address the possibility that an industry
could be attractive because certain companies are in it.
7 2ome people claim that environments %hich are characteri1ed by rapid& systemic and radical change re0uire
more fle'ible& dynamic or emergent approaches to strategy formulation. 2ee! ,isruptive /nnovation
7 2ometimes it may be possible to create completely ne% markets instead of selecting from e'isting ones. 2ee!
*lue Ocean 2trategy
Overvie% of the *ook ?Competitive 2trategy?
7 /n Part /& Porter discusses the structural analysis of industries (%ith the five forces)& the three generic
competitive strategies (overall Cost Aeadership& Focus& and ,ifferentiation)& offering an e'cellent frame%ork for
competitor analysis& competitive moves& strategy to%ard buyers and suppliers& structural analysis %ithin
industries (strategic groups& strategic mapping& mobility barriers)& and industry evolution (life cycle& evolutionary
processes).
7 /n Part //& Porter discusses competitive strategy %ithin various generic industry environments. 2uch as!
fragmented industries (%ith no real market leader)& emerging industries& mature industries& declining industries&
and global industries.
7 /n Part ///& Porter discusses strategic decisions %hich businesses8firms can take. 2uch as! vertical
integration (for%ard& back%ard& partnerships)& capacity e'pansion& and entry into ne% industries8businesses.