Introduction to Michael Porters Five Forces

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Michael E. Porter's five forces framework is used to evaluate the competitiveness, and hence the attractiveness and profitability of different markets and market segments.

It is important for business managers to realize that a 5 forces analysis should be conducted at the level of strategic business units (SBUs), and not at the level of the whole organization. Many larger companies have several SBUs conducting business in different markets that serve many different customer segments. Likewise, these SBUs may have completely different suppliers, competitors and substituting products.

Every SBU should therefore conduct its own analysis, and try to evaluate the attractiveness and profitability of its own markets and market segments. The five forces are shortly described below:

Competitive Rivalry

The evaluation of the rivalry between competitors helps to examine the degree of head-to-head competition in an industry. In Porter's "five forces" framework this issue is of course included, but is only seen as one of several forces that determine industry attractiveness. Commen reasons for high rivalry are depicted below:

§ Low industry growth rates

§ High exit barriers

§ Undifferentiated supply of products

§ Price wars to cover high fixed costs

Threat of new entrants

The threat of new entrants is usually based on the market entry barriers, which can be said to provide obstacles for newcomers to gain a foothold in any given industry. These barriers can take many different forms. Briefly, it can be said that entry barriers exist whenever it is difficult or not economically feasible for an outsider to copy or imitate the existing players' competitive capabilities. Common forms of entry barriers are depicted below:

§ Economies of scale

§ Capital requirement of entry

§ Access to supplies and distribution channels

§ Customer or supplier loyalty

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