Porter’s ‘Five Forces’ Model

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Notes on Industry Competitiveness

[Using Porter’s ‘five forces’ model]

This is a short supplemental note to Porter’s article “How Competitive Forces Shape Strategy”. This material is covered in Chapter 3 of your book.

In general, when analyzing industry competitiveness, start by identifying your focal industry. This goes at the center of the five forces picture. When thinking about bargaining power of buyers, the buyers are those individuals or firms that buy the finished product of the firms in the main industry. When thinking about bargaining power of suppliers, the suppliers are those firms that supply inputs (parts, raw materials, software, components...) to the firms in the main industry. Intra-industry rivalry is the extent of rivalry between the existing firms in the main industry. The figure below may help clarify this further.

[pic]
Let’s ignore the threat of substitute products and services for the time being. For example, if one were analyzing the auto industry, the picture would look something like the one on the following page.

[pic]

Similarly, if we were analyzing the PC industry, then: • The focal industry would be PC manufacturing • The existing firms in the main industry would be Dell, Hewlett-Packard, IBM and so on • The suppliers would be Intel (microprocessors), Microsoft (operating systems), Rambus (memory chips) and so on, who supply these inputs to the firms in the PC manufacturing business. • The buyers would be PC users like you and I, and corporate customers like NYU (who buys lots of PCs from Dell)

Similarly, if we were analyzing the apparel retailing industry, then: • The focal industry would be apparel manufacturing/retailing • The existing firms in the main industry would be firms like the Gap, American Apparel, Calvin Klein and so on • For firms that manufactured their own garments, the suppliers would be the firms that manufactured fabric, buttons, zippers and so on, and supplied these inputs to

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