Porter Five Forces

Topics: Strategic management, Porter five forces analysis, Barriers to entry Pages: 3 (480 words) Published: February 16, 2006
Michael Porter's 1979 framework uses concepts developed in IO economics to derive 5 forces that determine the attractiveness of a market. Porter referred to these forces as the microenvironment, to contrast it with the more general term macroenvironment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace.

Four forces -- the bargaining power of customers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products -- combine with other variables to influence a fifth force, the level of competition in an industry. Each of these forces has several determinants:

The bargaining power of customers
buyer concentration to firm concentration ratio
bargaining leverage
buyer volume
buyer switching costs relative to firm switching costs
buyer information availability
ability to backward integrate
availability of existing substitute products
buyer price sensitivity
price of total purchase
The bargaining power of suppliers
supplier switching costs relative to firm switching costs
degree of differentiation of inputs
presence of substitute inputs
supplier concentration to firm concentration ratio
threat of forward integration by suppliers relative to the threat of backward integration by firms cost of inputs relative to selling price of the product
importance of volume to supplier
The threat of new entrants
the existence of barriers to entry
economies of product differences
brand equity
switching costs
capital requirements
access to distribution
absolute cost advantages
learning curve advantages
expected retaliation
government policies
The threat of substitute products
buyer propensity to substitute
relative price performance of substitutes
buyer switching costs
perceived level of product differentiation
The intensity...

References: Porter, M. (1979) "How competitive forces shape strategy", Harvard Business Review, March/April 1979.
Porter, M. (1980) Competitive Strategy, The Free Press, New York, 1980.
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