Porter's Five Forces: Useful Tool for Analyzing Industrial Environment
Intensive competition among firms in the same industry tends to be one of the major characteristics of modern market-led economies caused by the fast pace of technological development and the globalization of economy. Thus, most companies aim at creating competitive advantages in order to increase customer satisfaction, deal with competitive threats and sustain market share as a basis for maintaining long-term profitability. Porter’s (1980) five forces framework appears as a useful tool for analyzing industrial environments, assessing the position and competitiveness of an organization and developing successful business strategies.
Porter’s Five Forces Model illustrates how the competitive landscape in an industry is strongly impacted by five prominent forces. Based on microeconomics, they determine the intensity of competition, the profitability and attractiveness of an industry and influence organizational strategies.
To begin with, according to Porter, new entry into the industry reduces the existing firm’s profitability. The threat of new entrants will depend on the extent to which there are barriers to entry. These can be: economies of scale for the advantage of incumbents, high initial investment and fixed costs, controlled access to suppliers and distributors, high switching costs for consumers, legal requirements and restrictions, price retaliation, product differentiation and customer loyalty to established brands. The airline industry, for instance, is one of the least profitable industries as Porter calls it a “zero star” industry, because each of the five forces is strong, leading to inferior industry performance. Entry barriers are relatively low as a potential new entrant would need only a couple of airplanes to establish itself. For example, easyJet started with only 2 aircrafts in 1995 and it is now one of the largest and most successful low cost airlines in the UK. Recent airline deregulations in Europe also contributed to attracting new
Porter’s Five Forces Model illustrates how the competitive landscape in an industry is strongly impacted by five prominent forces. Based on microeconomics, they determine the intensity of competition, the profitability and attractiveness of an industry and influence organizational strategies.
To begin with, according to Porter, new entry into the industry reduces the existing firm’s profitability. The threat of new entrants will depend on the extent to which there are barriers to entry. These can be: economies of scale for the advantage of incumbents, high initial investment and fixed costs, controlled access to suppliers and distributors, high switching costs for consumers, legal requirements and restrictions, price retaliation, product differentiation and customer loyalty to established brands. The airline industry, for instance, is one of the least profitable industries as Porter calls it a “zero star” industry, because each of the five forces is strong, leading to inferior industry performance. Entry barriers are relatively low as a potential new entrant would need only a couple of airplanes to establish itself. For example, easyJet started with only 2 aircrafts in 1995 and it is now one of the largest and most successful low cost airlines in the UK. Recent airline deregulations in Europe also contributed to attracting new