Porter's Five Forces Model: Industry Analysis
The External Analysis framework, also known as Porter's five forces, is one the fundamental business models widely used by businesses and managements consultants. Originally created by Michael Porter, it is applied for assessing market forces within an industry and developing strategic recommendations.
PORTER'S FIVE FORCES
Michael Porter had outlined the following 5 key external market forces: Supplier and Buyer Powers, Threat of New Entry, Threat of Substitutes and Industry Rivalry. The structured analysis of external forces within an industry allows for identifying weak links in company's strategy going forward. At the same time, it allows for strengthening company's positions and developing a new strategy, better equipped to withstand external pressures. Moreover, it is essential to track the dynamics of these forces through time. For instance, industry rivalry in one's market may seem low at the moment but may increase in the future due to a high threat of new entry.
Encompasses market concentration, diversity of competitors, product differentiation, excess capacity and exit barriers and cost conditions. The analysis of the above factors should lead to development of sound recommendations. For instance, a company operating in an industry with little product differentiation may decide to create a unique product line to capture a bigger share of the market. Excess capacity and high exit barriers (e.g. in the pulp and paper industry) may lead to higher competition and price dumping by existing players. A company may choose to diversify or horizontally integrate to safeguard itself from intensifying industry rivalry.
Threat of Substitutes
Relates to the existence of alternative products that have a similar utility as company's products but do not directly compete with them. The two important considerations are buyer's propensity to...