Porter' s Model

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Threat of New Entry

Rivalry Among

Existing Competitors

Bargaining Power

of Customers

Threat of Substitutes

Bargaining Power

of Suppliers

Economies of scale

Proprietary product

differences

Brand identity

Switching costs

Capital requirements

Access to distribution

Absolute cost advantages

Government policy

Expected retaliation

Relative price performance of substitutes

Switching costs

Buyer propensity to substitute

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

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

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

Porters Five Forces Analysis

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


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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.


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Michael Eugene Porter


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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 manygovernments, 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.


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Porter's Five ForcesImportance

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 takingwrong steps.


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1

The five forces that shapeindustry competition


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Porter's Five ForcesIntroduction

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 drivecompetition. 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 acorporate strategy should meet the opportunities

and threats in the organizations external

environment.


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Porter's Five Forcesunderstanding

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 andindustrys attractiveness, it is important to

analyse the situation and examine the impacts of

the forces.


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Porter's Five Forcesunderstanding

How each force affects a company, identifying the strength

and direction of each force.

It also provides with an opportunity to identify the strength ofthe 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 beprofitable.


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The five forces includethe following


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1. Potential Competitors/

threat of new players

(Companies currently not competing in

the industry but have the necessary

resources to do so)


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Potential Competitors / threat ofnew players

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?


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2. Threat of Substitutes

(Products in another industry that satisfy similar

needs)


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2. Threat of Substitutes

How many close substitutes areavailable?

How pricy are the substitutes?

What is the perceived quality ofthe substitutes?


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3. Intensity of rivalry

among established

firms(Direct competitors competing for

market share)


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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 ormonopoly industry?

What is the current industry growth rate?

How high are the exit barriers? Do yourcompetitors 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 competitorsadvertise?


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4. Bargaining power

of buyers

(Customers)


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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 sustainyour sales?

How hard is it for the buyers to switch and use a

competing product?

Are the buyers purchasing from you as well asyour competitors?

Do the buyers have the capacity to enter your

business and produce the goods themselves?


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5. Bargaining power

suppliers


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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 asmall portion of the suppliers total revenue?

Do you have high switching cost to use another

supplier?

Do suppliers have the capacity to enter yourbusiness?

Does your company capable to enter the

suppliers business?


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Customers

Firm

Suppliers

Competitors Complementors

A player is your complementor

with respect to customers if

customers value your product more

when they have the other players

product as well

A player is your competitorwith

respect to customers if customers

value your product less when they

have the other players product as

well

A player is your complementor

with respect to suppliers if it is

moreattractive for a supplier to

provide resources to you when it

is also supplying the other player

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

Coopetition and theValue Net

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


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Neutralizing The FiveCompetitive Forces

Force

Entry

Rivalry

Substitutes

Buyers

Suppliers

Method for Neutralizing Force

Erecting barriers (isolatingmechanisms)create exploit economies of scale,aggressive deterrence, design in switching costs, etc.

Compete on nonprice dimensions:cost leadership, differentiation, cooperation, etc.

Improve attractiveness compared tosubstitutes: better service, more features, etc..

Reduce buyer uniqueness:forwardintegrate, differentiate product, new customers, etc..

Reduce supplier uniqueness:backwardintegrate, obtain minority position, second source, etc..

Documents

Porter' s Model