Industry Analysis: The Five Forces
Cole Ehmke, Joan Fulton, and Jay Akridge Department of Agricultural Economics Kathleen Erickson, Erickson Communications Sally Linton Department of Food Science
Assessing Your Marketplace
The economic structure of an industry is not an accident. Its complexities are the result of long-term social trends and economic forces. But its effects on you as a business manager are immediate because it determines the competitive rules and strategies you are likely to use. Learning about that structure will provide essential insight for your business strategy. Michael Porter has identified five forces that are widely used to assess the structure of any industry. Porter’s five forces are the: • Bargainingpowerofsuppliers, • Bargainingpowerofbuyers, • Threatofnewentrants, • Threatofsubstitutes,and • Rivalryamongcompetitors. Together,thestrengthofthefiveforcesdeterminestheprofit potentialinanindustrybyinfluencingtheprices,costs,and required investments of businesses—the elements of return on investment. Stronger forces are associated with a more challenging business environment. To identify the important structuralfeaturesofyourindustryviathefiveforces,you conductanindustryanalysisthatanswersthequestion, “What are the key factors for competitive success?”
Audience: Business managers seeking to assess the nature of their marketplace Content: Presents five forces that influence the profitability of an industry Outcome: Reader should understand the forces and be able to counter them with appropriate tactics
Using This Publication
This publication describes five forces that influence an industry. The publication includes a set of application questions that will help you evaluate the structure of the industry you are in or are considering entering. The more you understandaboutthestrengthofeachforce,thebetterable you will be to respond. The forces affecting profitability are often beyond your control,soyoumustchoosetacticstorespondtotheforces rather than try to change the business environment. This publication offers insight on specific tactics you need for success when facing competitive situations. While you may assessanyoneforceindividually,youwillgainthemostvalue by assessing all five of the forces Witheachforce,a“Perspective”featureillustratestheforce for an Indiana wine entrepreneur by evaluating that marketplace.Toavoidrepetition,weusetheword“product”tomean eitheraproductoraservice.Readmoreaboutthefiveforces inPorter’sbook,Competitive Strategy.
Bargaining Power of Suppliers
How Much Power Do Your Suppliers Have Over You?
Anybusinessrequiresinputs—labor,parts,rawmaterials, and services. The cost of your inputs can have a significant effect on your company’s profitability. Whether the strength of suppliers represents a weak or a strong force hinges on the amountofbargainingpowertheycanexertand,ultimately, on how they can influence the terms and conditions of transactions in their favor. Suppliers would prefer to sell to you at the highest price possible or provide you with no more servicesthannecessary.Iftheforceisweak,thenyoumaybe able to negotiate a favorable business deal for yourself. Conversely,iftheforceisstrong,thenyouareinaweak position and may have to pay a higher price or accept a lower level of quality or service.
• Supplierscanselldirectlytoyourcustomers, bypassingtheneedforyourbusiness.Forexample,a manufacturer could open its own retail outlet and compete against you. • Itisdifficultforyoutoswitchtoanothersupplier.For example,ifyourecentlyinvestedinaunique inventory and information management system to workeffectivelywithyoursupplier,itwouldbe expensive for you to switch suppliers. • Youdonothaveafullunderstandingof...