Porter Five Forces Analysis

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Porter five forces analysis is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979. It draws uponindustrial organizationeconomics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit. Five forces

Threat of new competition
Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will tend towards zero (perfect competition). * The existence of barriers to entry (patents, rights, etc.) The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily. * Economies of product differences

* Brand equity
* Switching costs or sunk costs
* Capital requirements
* Access to distribution
* Customer loyalty to established brands
* Absolute cost
* Industry profitability; the more profitable the industry the more attractive it will be to new competitors.

Threat of substitute products or services
The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives. Note that this should not be confused with competitors' similar products but entirely different ones instead. For example, tap water might be considered a substitute for Coke, whereas Pepsi is a competitor's similar product. Increased marketing...
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