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The Porter model of competitive industry structure:

Porters 5 forces

Purpose:The purpose of this analysis is to evaluate the attractiveness of an industry / the profitability of an

industry. This analysis might be relevant for

a new firm before entering in order to decide on the best competitive strategy, most

realistic budgets etc. or in order to decide not to enter

existing firms in order to decide on the best competitive strategy, most

realistic budgets etc

the government in order to monitor the competitive situation as background

information for competition policies, regulations etc

Starting point:

You should always start by defining the industry. In order to make a proper analysis (i.e. to find the

number of firms, number and closeness of substitutes, the nature of the product etc) it is importantto know the

product / product group

geographic area (a region, a country, a group of countries etc notice that imported productsalso belong to the industry)

You should also make sure that you know the buyers (BTC or BTB)

Conclusion:After analysing a force you should conclude and relate to the overall purpose, i.e. how is the

conclusion affecting the overall attractiveness of the industry.

intensity of rivalry the higher intensity the less attractive is the industry

new entrants the greater threats from new entrants the less attractive is the industry

substitutes the greater threats from substitutes the less attractive is the industry

Intensity of

rivalry

Industry

competitors

New entrants

Suppliers Buyers

Substitutes

Bargaining power

of buyers

Bargaining power

of suppliers

Threat

of new

entrants

Threat

of

substitutes

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suppliers the higher bargaining power the less attractive is the industry

buyers the higher bargaining power the less attractive is the industry

Finally you should make an overall conclusion about the attractiveness / profitability of the industry

(the analyses of the individual forces might point in different directions so you should evaluate the

importance of the forces)

Factors that might be relevant to look at when analysing the forces:You should never look into all bullet points below only those relevant for the industry in question

Intensity of rivalry / degree of competition

The concentration of the industry (i.e. number of firms, concentration ratios, price elasticity

of demand))

The rate of market growth (income elasticity of demand)

Degree of differentiation (the nature of the product: homogeneous or differentiated,

price elasticity of demand)

Profit-margin (illustrates firms control over prices / market power)

Structure of costs

Switching costs

Exit barriers

Illustrate the competitive situation by using the relevant price model plus related theories from

economics.

Substitutes

Buyers willingness to substitute (cross price elasticity)

The relative price and performance of substitutes

The costs of switching to substitutes

SuppliersThe suppliers have high bargaining power when

Few suppliers and many firms in the industry

Unique or differentiated products from suppliers

Suppliers threaten to integrate forwards into the industry and the industry does not threaten to

integrate backward into supply

The industry is not a key customer group to the suppliers

Buyers

The buyers have high bargaining power when

Few dominant buyers and many firms in the industryBuyers purchase in large volumes

The product is homogeneous / standard product

Buyers earn low profit (BTB) / buyers have low income (BTC: income elasticity)

The industry is not a key supplying group for the buyers

Buyers threaten to integrate backward into the industry and the industry does not threaten to

integrate forwards.

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New entrants

If entry barriers exist firms in the industry can produce with more than normal profit in the long run.

Different barriers to entry:

Environmental factors

Economies of scale (natural monopoly)

High entry and exit costs / capital requirementsTrade restrictions (national monopoly)

High transportation costs (local monopoly)

High switching costs (might exist because of the policy of the monopoly / oligopoly firm)

Other legal protection

The policy of the monopoly / oligopoly firm

Product differentiation / brand identity (discriminating monopoly, top priority to advertising/

quality, design etc.)

Lower costs for a established firm / absolute costs advantages (top priority to developing new

technology in the process of production)Ownership of, or control over, key factors of production (top priority to vertical integration -

backward)

Ownership of, or control over, wholesale or retail outlets / access to distribution channels (top

priority to vertical integration - forward)

Mergers and take-overs / expected retaliation

Aggressive tactics / expected retaliation (top priority to pricing policy)

Intimidation