Porter's Five Forces Model

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Evolution of Porter's Five Forces Model
Five forces is a framework for the industry analysis and business strategy development developed by Michael E. Porter of Harvard Business School in 1979. Michael Porter is a professor at Harvard Business School andis a leading authority on competitive strategy and international competitiveness.Michael Porter was born in Ann Arbor, Michigan. Five forces uses concepts developing, Industrial Organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the industry profitability. An "unattractive" industry is one where the combination of forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition".

Introduction

Five Forces Model by Michael Porter
Five Forces model of Michael Porter is a very elaborate concept for evaluating company's competitive position. Michael Porter provided a framework that models an industry and therefore implicitly alsobusinesses asbeing influenced by five forces.Michael Porter's Five Forces model is often used in strategic planning. Porter's competitive fiveforces model is probably one of the mostcommonly used business strategy tools and has proven its usefulness in numerous situations when exploring strategic management models . Three of Porter's five forces refer to competition from external sources. The remainder are internal threats. It is useful to use Porter's five forces in conjunction with SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats). A change in any of the forces normally, requires a business unit to re-assess the marketplace given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average. Porter's five forces include :

Three forces from 'horizontal' competition
* Threat of new entrants or barriers to entry
* Threat of substitute products or substitutes
* Threat of established rivals or competitive rivalry
Two forces from 'vertical' competition
* The bargaining power of buyers or buyers
* The bargaining power of suppliers or suppliers

Force 1: Barriers to entry
Barriers to entry measure how easy or difficult it is for new entrants to enter into the industry. This can involve for example: * Cost advantages (economies of scale, economies of scope)

* Access to production inputs and financing,

* Government policies and taxation

* Production cycle and learning curve

* Capital requirements

* Access to distribution channels
Patents, branding, and image also fall into this category.

Force 2: Threat of substitutes
Every top decision maker has to ask: How easy can our product or service be substituted? The following needs to be analyzed: * How much does it cost the customer to switch to competing products or services?

* How likely are customers to switch?

* What is the price-performance trade-off of substitutes? If a product can be easily substituted, then it is a threat to the company because it can compete with price only.

Force 3: Competitive Rivalry
In this,we have to analyze the level of competition between existing players in the industry. * Is one player very dominant or all equal in strength/size?

* Are there exit barriers?

* How fast does the industry grow?

* Does the industry operate at surplus or shortage?

* How is the industry concentrated?

* How do customers identify themselves with your brand?

* Is the product differentiated?

* How well are rivals diversified?

Force 4: Bargaining power of buyers
Now the question is how strong the position of buyers is. For example,cancustomerswork together to order large volumes to...
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