Summary and interpretation by Prof. Tony Lima February 25, 2006
Figure 1: Porter’s Five Forces From Michael Porter, Competitive Advantage, Simon & Schuster, New York, 1985, p. 5
Prof. Michael Porter teaches at the Harvard Business School. He has identified five forces that determine the state of competitiveness in a market. The forces also influence the profitability of firms already in the industry. These five forces are summarized in the above diagram. (The fifth force is the degree of rivalry that currently exists among firms already in the industry.) Here are a few additional details about Porter’s model.1 1. Barriers to Entry Economies of scale mean larger firms can produce at lower cost per unit. This tends to lower the number of firms in the industry and reduce competition. Proprietary product differences are the characteristics that make a product appeal to a large market segment. But only those characteristics that cannot be copied at low cost by competitors (“proprietary”) will be a barrier to entry. Brand identity is the extent to which buyers take the brand name into account when making purchase decisions. Capital requirements are the total cost of acquiring the plant and equipment necessary to begin operating in the industry.
This material is a summary drawn from Porter’s Competitive Advantage (1985). The material in question is on pages 5 – 8.
“Porter’s Five Forces” by Prof. Lima February 25, 2006
2. Bargaining Power of Suppliers Differentiation of inputs means that different suppliers provide different input characteristics for inputs that basically do the same job. The greater the degrees of differentiation among suppliers the more bargaining power suppliers have. Presence [and availability] of substitute inputs means the extent to which it is possible to switch to another supplier for an input (or a close substitute). The greater the number and closeness of substitute inputs the...