Porter's Five Forces
Analysis
Michael Porter's 5 forces analysis is a framework for industry
analysis and business strategy development developed by
Michael Porter of Harvard Business School in 1979 . It uses concepts
developed in Industrial Organization (IO) economics to derive 5 forces
that determine the competitive intensity and therefore attractiveness of
a market. Porter referred to these forces as the microenvironment, to
contrast it with the more general term macroenvironment. They consist of
those forces close to a company that affect its ability to serve its
customers and make a profit. A change in any of the forces normally
requires a company to re-assess the marketplace.
Strategy consultants use Porter's five
forces framework when making a qualitative evaluation of a firm's
strategic position. The framework is textbook material for modern
business studies and therefore widely known.
Porter's Five Forces include three
forces from 'horizontal' competition: threat of substitute products, the
threat of established rivals, and the threat of new entrants; and two
forces from 'vertical' competition: the bargaining power of suppliers,
bargaining power of customers.
Each of these forces has several
determinants:
Porters Five Forces
The threat of substitute products
The existence of close substitute
products increases the propensity of customers to switch to alternatives
in response to price increases (high elasticity of demand).
- buyer propensity to substitute
- relative price performance of
substitutes
- buyer switching costs
- perceived level of product
differentiation
The threat of the entry of new
competitors
Profitable markets that yield high
returns will draw firms. The results is many new entrants, which will
effectively decrease profitability. Unless the entry of new firms can be
blocked by incumbents, the profit rate will fall towards a competitive
level (perfect competition).
- the existence of barriers to entry
(patents, rights, etc.)
- economies of product differences
- brand equity
- switching costs or sunk costs
- capital requirements
- access to distribution
- absolute cost advantages
- learning curve advantages
- expected retaliation by incumbents
- government policies
The intensity of competitive rivalry
For most industries, this is the major
determinant of the competitiveness of the industry. Sometimes rivals
compete aggressively and sometimes rivals compete in non-price
dimensions such as innovation, marketing, etc.
- number of competitors
- rate of industry growth
- intermittent industry overcapacity
- exit barriers
- diversity of competitors
- informational complexity and
asymmetry
- fixed cost allocation per value
added
- level of advertising expense
The bargaining power of customers
Also described as the market of
outputs. The ability of customers to put the firm under pressure and it
also affects the customer's sensitivity to price changes.
- buyer concentration to firm
concentration ratio
- bargaining leverage
- buyer volume
- buyer switching costs relative to
firm switching costs
- buyer information availability
- ability to backward integrate
- availability of existing
substitute products
- buyer price sensitivity
- price of total purchase
- RFM Analysis
The bargaining power of suppliers
Also described as market of inputs.
Suppliers of raw materials, components, and services (such as expertise)
to the firm can be a source of power over the firm. Suppliers may refuse
to work with the firm, or e.g. charge excessively high prices for unique
resources.
- supplier switching costs relative
to firm switching costs
- degree of differentiation of
inputs
- presence of substitute inputs
- supplier concentration to firm
concentration ratio
- threat of forward integration by
suppliers relative to the threat of backward integration by firms
- cost of inputs relative to selling
price of the product
This 5 forces analysis is just one part
of the complete Porter strategic models. The other elements are the
value chain and the generic strategies.
References
http://en.wikipedia.org/wiki/Porter_5_forces_analysis
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