Michael Porter’s Five Forces

Topics: Strategic management, Management, Porter five forces analysis Pages: 10 (2365 words) Published: July 12, 2010
Michael Porter’s five forces is a model used to explore the environment in which a product or company operates

Five forces analysis looks at five key areas mainly the threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry. New Entrants
SuppliersIndustry competitors and extent of rivalryBuyers
Introduction to Porter’s 5 forces
The model of the Five Competitive Forces was developed by Michael E. Porter in his book „Competitive Strategy: Techniques for Analyzing Industries and Competitors“ in 1980. Since that time the ‘five forces tool’ has become an important method for analyzing an organizations industry structure in strategic processes. Porters model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should based on an understanding of industry structures and the way they change. Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porters model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry scan. Overview

The Five Forces model of Porter is an ‘outside looking in’ business unit strategy tool that is used to make an analysis of the attractiveness or value of an industry structure. The Competitive Forces analysis is made by the identification of 5 fundamental competitive forces: •The entry of competitors (how easy or difficult is it for new entrants to start to compete, which barriers do exist) •The threat of substitutes (how easy can our product or service be substituted, especially cheaper) •The bargaining power of buyers (how strong is the position of buyers, can they work together to order large volumes) •The bargaining power of suppliers (how strong is the position of sellers, are there many or only few potential suppliers, is there a monopoly) •The rivalry among the existing players (is there a strong competition between the existing players, is one player very dominant or all all equal in strength/size) Some academics believe that a sixth force could be included – government. The Original Porter’s Five Factors:

Threat of New Entrants -
The easier it is for new companies to enter the industry, the more cut-throat competition there will be. Factors that can limit the threat of new entrants are known as barriers to entry. Some examples include: •Existing loyalty to major brands

Incentives for using a particular buyer (such as frequent shopper programs) •High fixed costs
Scarcity of resources
Government restrictions or legislation
Entry protection (patents, rights, etc.)
Economies of product differences
Brand equity
Switching costs or sunk costs
Capital requirements
Access to distribution
Absolute cost advantages
Learning curve advantages
Expected retaliation by incumbents
Power of Suppliers
This is how much pressure suppliers can place on a business. If one supplier has a large enough impact to affect a company’s margins and volumes, then they hold substantial power. Here are a few reasons that suppliers might have power: •There are very few suppliers of a particular product

There are no substitutes
The product is extremely important to the buyer, they cannot do without it •The supplying industry has a higher profitability than the buying industry •Supplier switching costs relative to firm switching costs •Degree of differentiation of inputs

Presence of substitute inputs

References: This tool was created by Harvard Business School professor, Michael Porter, to analyze the attractiveness and likely-profitability of an industry. Since publication, it has become one of the most important business strategy tools. The classic article which introduces it is “How Competitive Forces Shape Strategy” in Harvard Business Review 57, March – April 1979, pages 86-93
Michael Porter’s key books:
Competitive Strategy: Techniques for Analyzing Industries and Competitors, 1980
Competitive Advantage: Creating and Sustaining Superior Performance, 1985
Competition in Global Industries, 1986
The Competitive Advantage of Nations, 1990
Key words:
Porter’s 5 forces, analysis, review, Porter, Harvard, competitors, substitutes, buyers, suppliers, change, strategic, strategy, competitive, tool, framework
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