Porters Five Forces Analysis

Threat of New Entry

Economies of scale Proprietary product differences Brand identity Switching costs Capital requirements Access to distribution Absolute cost advantages Government policy Expected retaliation

Bargaining Power of Suppliers

Differentiation of inputs Switching costs Presence of substitute inputs Supplier concentration Importance of volume to supplier Cost relative to total purchases Impact of inputs on cost or differentiation Threat of forward integration

Bargaining Power of Customers

Buyer concentration Buyer volume Buyer switching costs Buyer information Ability to integrate backward Substitute products Price / total purchases Product differences Brand identity Impact of quality / performance Buyer profits

Rivalry Among Existing Competitors

Industry growth Fixed costs / value added Overcapacity Product differences Brand identity Switching costs Concentration and balance Informational complexity Diversity of competitors Corporate stakes Exit barriers

Threat of Substitutes
Relative price performance of substitutes Switching costs Buyer propensity to substitute

Source: Michael E. Porter, Competitive Advantage (New York: Free Press, 1985)

Porter's Five Forces (A Planning Tool)

Is a framework for the industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979.

Michael Eugene Porter

Michael Eugene Porter

Is the Bishop William Lawrence University Professor at Harvard Business School. He is a leading authority on company strategy and the competitiveness of nations and regions. Michael Porters work is recognized in many governments, corporations and academic circles globally. He chairs Harvard Business School's program dedicated for newly appointed CEOs of very large corporations. One of his most significant contributions is the five forces.

Porter's Five Forces Importance

It helps to understand both the strength of a firms current competitive position, and the strength of a position a company is looking to move into. The Five Force framework focuses on business concerns rather than public policy, emphasizes extended competition for value rather than just competition among existing rivals. It will enable a company to take fair advantage of its strengths, improve weaknesses, and avoid taking wrong steps.

The five forces that shape industry competition

Porter's Five Forces Introduction

The ideas and models emerged during the period from 1979 to the mid-1980s. The Porters Five Forces model is a simple tool that supports strategic understanding where power lies in a business situation. Porter defined the forces which drive competition. contending that the competitive environment is created by the interaction of five different forces acting on a business. Porters model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment.

Porter's Five Forces understanding

In conducting an analysis it is required to have an idea of all relevant factors for the companys market situation, and then check against the factors presented for each force in the diagram. The next step is to highlight the key factors on a diagram, and summarize the size and the scale of the force on the diagram. After identifying favourable and unfavourable forces for the companys performance and industrys attractiveness, it is important to analyse the situation and examine the impacts of the forces.

Porter's Five Forces understanding

How each force affects a company, identifying the strength and direction of each force. It also provides with an opportunity to identify the strength of the position and the ability to make a sustained profit in the industry. Porters model is a strategic tool used to identify whether new products, services or businesses have the potential to be profitable.

The five forces include the following

1. Potential Competitors/ threat of new players

(Companies currently not competing in the industry but have the necessary resources to do so)

Potential Competitors /
new players

threat of

How loyal are the end users in this industry? How troublesome or hard is it for the end users to switch and use another product? Does it require a large seed capital to enter this industry? Do entries to this industry regulated by government? How hard is it to gain access to the distribution channels? How long does it take for new staff to acquire the necessary skills to do the work?

2. Threat of Substitutes
(Products in another industry that satisfy similar needs)

2. Threat of Substitutes

How many close substitutes are available? How pricy are the substitutes? What is the perceived quality of the substitutes?

3. Intensity of rivalry among established firms

(Direct competitors competing for market share)

Intensity of rivalry among established firms

How many close competitors exist in the industry? What are the sizes of your close competitors? What is the industry structure? Is it a fragmented, consolidated, oligopoly or monopoly industry? What is the current industry growth rate? How high are the exit barriers? Do your competitors have a high committed fixed cost thus they have to operate even at a loss? How diversified are your competitors? How extensively do your direct competitors advertise?

4. Bargaining power of buyers

(Customers)

4. Bargaining power of buyers

How large are your buyers company? How many companies are there for the buyer to choose from? Are the buyers buying a huge volume? Do you depend only on a few buyers to sustain your sales? How hard is it for the buyers to switch and use a competing product? Are the buyers purchasing from you as well as your competitors? Do the buyers have the capacity to enter your business and produce the goods themselves?

5. Bargaining power
suppliers

5. Bargaining power suppliers

Are there substitutes for your suppliers products? Do your suppliers serve multiple industries? Does the total industry revenue accounting for only a small portion of the suppliers total revenue? Do you have high switching cost to use another supplier? Do suppliers have the capacity to enter your business? Does your company capable to enter the suppliers business?

Coopetition and the Value Net

A player is your competitor with respect to customers if customers value your product less when they have the other players product as well

Customers

A player is your complementor with respect to customers if customers value your product more when they have the other players product as well

Competitors

Firm

Complementors

A player is your competitor with respect to suppliers if it is less attractive for a supplier to provide resources to you when it is also supplying the other player

Suppliers

A player is your complementor with respect to suppliers if it is more attractive for a supplier to provide resources to you when it is also supplying the other player

Source: Adam Brandenburger and Barry Nalebuff, Co-operation (New York: Currency Doubleday, 1996)

Neutralizing The Five Competitive Forces

Force Entry Rivalry Method for Neutralizing Force Erecting barriers (isolating mechanisms) create exploit economies of scale,
aggressive deterrence, design in switching costs, etc.

Compete on nonprice dimensions:

cost leadership, differentiation, cooperation, etc.

Substitutes
Buyers Suppliers

Improve attractiveness compared to substitutes: better service, more features, etc.. Reduce buyer uniqueness: forward
integrate, differentiate product, new customers, etc..

Reduce supplier uniqueness: backward

integrate, obtain minority position, second source, etc..