Five Force Analysis Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 14-0

Five Force AnalysisFive Force Analysis

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 14-1

Porter 5 Forces Analysis

Porter 5 Forces AnalysisAn excellent framework that could

help managers, entrepreneurs and investors • Evaluate whether a business is

operating in a profitable industry.

• Helps to oppose a competitive environment ( environment audit = environment invistigation) focus on the business not specific product.

Porter’s model deals with the strategy towards the opportunities and threats in the organizations external environment (especially competitive strategy ).

Porter´s ModelPorter´s Model

Porter has identified five competitive forces that

shape every industry and every market. These

forces determine the intensity of competition and

hence the profitability .

From the results of Porter´s model analysis,

strategies could be formulated to help companies

identify opportunities and avoid threats.

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Porter’s five forces modelPorter’s five forces model

Each force in this framework could be categorized as :

– Strong Strong forces are perceived as threats to the enterprise. Strong forces have strong bargaining power thus limit the enterprise’s ability to increase price or lower cost.

– Medium– Weak

Weak forces are perceived as opportunities. Weak forces have low bargaining power thus the enterprise could increase price or lower cost to sustain more profit.

Porter’s five forces modelPorter’s five forces model

PORTE´S MODELPORTE´S MODEL


Threat of EntryThreat of Entry

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New competitor could change major determinants of the market environment (e.g. prices, customer loyalty). Always a latent pressure for reaction and adjustment for existing players in the market.

Threat of entryThreat of entry

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• Economies of scale e.g. the

benefits associated with bulk

purchasing.

• The high or low costs of entry e.g.

how much will it cost for the

latest technology?

• How long does it take for new

staff to acquire the necessary

skills to do the work?

• How loyal are the end users in

this industry?

Threat of entryThreat of entry

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• Ease of access to distribution

channels e.g.: Do our competitors

have the distribution channels sewn

up?

• Will competitors retaliate?

• Government action e.g. will new

laws be introduced that will weaken

our competitive position?

• How important is differentiation?

E.g. The Champagne brand cannot

be copied.

Bargaining Power of buyerBargaining Power of buyer


Bargaining Power of buyer Bargaining Power of buyer

Hotel industry

–Especially Users Sensitive to prices.

–Tourists looking for cheaphotels.com

–More hotel competitors within a tourist hotspot, bargaining

power of customer will be higher because customer able to

do comparison

–Hotel will use different type of promotion, prices,

advertisement or other way to attract customer.

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Buyers has ability to influence the prices and demand

higher quality. Ex: airline industry

Trigger competition in a competitive environment ( airline

industry).

This forces airlines to bring down prices in order to

compete which gives the buyers the advantage of enjoying

lower prices and different promotions

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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?

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Bargaining power of suppliersBargaining power of suppliers

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The term 'suppliers' comprises all

sources for inputs that are needed

in order to provide goods or services

e.g. Hotel industry ( furnishings

companies, training service providers,

marketing companies , ..etc)


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• The more powerful a seller is on

buyer, more influence the seller has.

• This influence reduce the profits of

the buyer through more

advantageous pricing, limiting quality

of the product or service, or shifting

some costs onto the buyer (e.g.

shipping costs).

Bargaining power of suppliersBargaining power of suppliers Suppliers are powerful if:

– Suppliers are concentrated or differentiated: If there are only a

few suppliers (or one) in the market, the suppliers will have

more leverage because of the lack of available alternatives.

– Significant costs involved in switching suppliers: Customers are

less likely to switch suppliers if there are large costs associated

with switching.

– Suppliers can forward integrate: If a supplier has the power to or

threatens to forward integrate, the buyer may be forced to accept

influence from the supplier.14-16


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

supplier’s 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 supplier’s

business?

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Treath of substituteTreath of substitute

A threat from substitutes exists if there are alternative products

with lower prices of better performance parameters for the

same purpose.

They could potentially attract a significant proportion of

market volume and hence reduce the potential sales volume for

existing players.

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Ex: Hotel face a threat of substitutes,(cottage and B&B , Inn ) popular and acceptable for consumer (standard service with very reasonable price)

Treath of substituteTreath of substitute

How many close substitutes are available?

How pricy are the substitutes?

What is the perceived quality of the

substitutes?

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RivalityRivality

This force describes the intensity of competition between

existing players (companies) in an industry.

High competitive pressure results in pressure on prices,

margins, and hence, on profitability for every single

company in the industry

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Rivalry among competitors can lead to an aggressive pricing and promotion in battles to benefit and attract more customers. In hotel industry, there is low switching cost for consumer, they can change hotel anytime so degree rivalry is very high.

Strategies formulationStrategies formulation

After analyzing each force individually, the next step is to

interrupt the results of this framework as a whole.

having strong suppliers that are raising their prices, are you able

to shift the cost to your customers? Do you have a weak buyer?

You can also formulate strategies according to the results to

change your situation. For instance, you can stop buying from

your suppliers. You can also launch your own retailers and sell

your own goods through your own distribution channels.

Depending on your own situation, try to formulate the right

strategies to increase your bargaining power against the five

forces.14-21

Documents

Five Force Analysis Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 14-0