Porters Five Forces Model Michael Porter (Harvard, Competitive Strategy 1980) developed the so called 5 Five Forces Forces Analys Analysis is mode modell to bette betterr ident identify ify factor factorss that that shap shapee the the char charact acter er of compe competit tition ion,, to asse assess ss the the stru structu ctural ral attra attracti ctive venes nesss and bu busin siness ess value value of any any industry and to pinpoint strengths and weaknesses in a company. In addition to and in combination with the SWOT analysis , the Five Forces model by
Michael Porter provides another analysis tool to identify opportunities and risks when entering untapped territory in any industry or market.
Porter’s Five Forces model, other than a SWOT analysis, provides clear action and thus does not rely solely on subjective judgment. If the actions that derived from the Five
Forces model are synchronized with business requirements and goals it can become a substantial business driver in the competitive environment. Porters Five Forces Model is used for analysis of an industry or pure competition within a market. It is likely the best model to be used in decisions of entry or change
should always always be considered considered during the business planning stage within a market , and should in a company life cycle.
The Porters Five Forces model proposes that an industry is influenced by five forces . An executive can use the model to understand the industry competitive landscape, to determine how and where the firm should operate. The model is also used to analyze the attractiveness of an industry structure. Porters Five Forces Model is also known as Porter's Competitive Forces model ,
probably one of the most often used business strategy tools . It has proven its usefulness Porter er's 's model model is part partic icul ular arly ly stro strong ng in thin on numero numerous us occasio occasions ns . Port thinki king ng in a competitive mindset - from external forces to inside the company .
Methods The strength of each of the five forces affecting competition in the chosen industry is to be assessed. The company’s position compared to the underlying causes of each force is also assessed .
A plan of action is devised that may include: 1) Positioning the organization to provide the best defense against competitive forces. 2) Influencing the balance of the forces through strategic moves and other pro-active measures. 3) Anticipating shifts in the forces and positioning the organization and its goals and actions accordingly. accordingly.
Michael Porter's Five Forces Model
Porter explains that there are five forces that determine industry attractiveness and long-run industry profitability . These five "competitive forces" are:
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The threat of entry of new competitors (new entrants)
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The threat of substitutes
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The bargaining power of buyers
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The bargaining power of suppliers
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The degree of rivalry between existing competitors
Threat of New Entrants
New entrants to an industry can raise the level of competition , thereby reduc reducing ing its attractiveness . The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are
agenc y, restaurants). Key barriers to entry include: very easy to enter (e.g. estate agency
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Economies of scale
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Capital / investment requirements
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Customer switching costs
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Access to industry distribution channels
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The likelihood of retaliation from existing industry players.
Threat of Substitutes
The pres presenc encee of substi substitut tutee prod product uctss can can lower lower indu industr stry y attra attracti ctiven venes esss and and profitability as they limit price levels . The threat of substitute products depends on:
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Buyers' willingness to substitute
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The relative price and performance of substitutes
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The costs of switching to substitutes
Bargaining Power of Suppliers
Suppli Sup plier erss are are the bu busin siness esses es that that supp supply ly materi materials als & other other prod produc ucts ts into into the the industry .
The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company's profitability . If suppliers have high bargaining
power over a company, then in theory the company's industry is less attractive . The bargaining power of suppliers will be high when: -
There are many buyers and few dominant suppliers
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There are undifferentiated, highly valued products
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Supp Su pplie liers rs thre threat aten en to integ integrat ratee forwar forward d into into the the indu industr stry y (e.g. (e.g. brand brand manufacturers threatening to set up their own retail outlets)
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Buyers do not threaten to integrate backwards into supply
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The industry is not a key customer group to the suppliers
Bargaining Power of Buyers
Buyers are the people / organisations who create demand in an industry.
The bargaining power of buyers is greater when:
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There are few dominant buyers and many sellers in the industry.
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Products are standardized.
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Buyers threaten to integrate backward into the industry.
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Suppliers do not threaten to integrate forward into the buyer's industry.
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The industry is not a key supplying group for buyers.
Intensity of Rivalry
The intensity of rivalry between competitors in an industry will depend o n: - The structure of competition - for example, rivalry is more intense where there are
many small or equally sized competitors; rivalry is less when an industry has a clear market leader lead er.. example,, indust industrie riess with with high - Th Thee struc structur turee of indus industry try costs costs - for example high fixed fixed costs costs encourage competitors to fill unused capacity capa city by price cutting.
- Degree of differentiation - industries where products are commodities (e.g. steel, coal)
have greater rivalry; industries where competitors can differentiate their products have less rivalry. - Switching costs - rivalry is reduced where buyers have high switching costs - i.e. there
is a significant cost associated with the decision to buy a product from an alternative supplier. - Strategi Strategicc objectiv objectives es - when competitors are pursuing aggressive growth strategies,
rivalry is more intense. Where competitors are "milking" profits in a mature industry, the degree of rivalry is less. - Exit barriers - when barriers to leaving an industry are high (e.g. the cost of closing
down factories) - then competitors tend to exhibit greater rivalry. rivalry.
While the Porters Five Forces model in regards to decision making, is to collect, analyze and present data for the decision maker, Porter identifies three generic strategies to address industry rivalry . Strategies can be formed on three levels - corporate, business
unit and functional or department level. The Strategies are cost leadership, differentiation and competitive advantage . The best decision will position the firm to
leverage strengths and defend against a gainst adverse effects of the five forces.
