Porters Five Force Model
Michael Porter’s
Five Forces Model
Michael Porter …
“An industry’s profit potential is largely determined by the intensity of competitive rivalry within that industry.”
Porter’s Five Forces
Portfolio Analysis …
… Strategy at the time (1970s) was focused on two dimensions of the portfolio grids … … Industry Attractiveness … Competitive Position
Where was Michael Porter coming from?
School of Economics …
… at Harvard …
Structural reasons why …
… some industries were profitable * Firm concentration * Established cost advantages * Product differentiation * Economies of scale
Structural reasons …
… all represented barriers to entry in certain industries, thus allowing those industries to be more profitable than others.
Porters Five Forces …
* Threat of Entry * Bargaining Power of Suppliers * Bargaining Power of Buyers * Development of Substitute Products or Services * Rivalry among Competitors
Barriers to Entry …
… large capital requirements or the need to gain economies of scale quickly. … strong customer loyalty or strong brand preferences. … lack of adequate distribution channels or access to raw materials. materials
Power of Suppliers …
… high when
* A small number of dominant, highly concentrated suppliers exists. * Few good substitute raw materials or suppliers are available. * The cost of switching raw materials or suppliers is high.
Power of Buyers …
… high when
* Customers are concentrated, large or concentrated buy in volume . * The products being purchased are standard or undifferentiated making it easy to switch to other suppliers. * Customers’ purchases represent a major portion of the sellers’ total revenue.
Substitute products …
… competitive strength high when
* The relative price of substitute products declines . * Consumers’ switching costs decline. decline * Competitors plan to increase market penetration or production capacity. capacity
Rivalry among competitors
… intensity increases
Five Forces Model
Michael Porter …
“An industry’s profit potential is largely determined by the intensity of competitive rivalry within that industry.”
Porter’s Five Forces
Portfolio Analysis …
… Strategy at the time (1970s) was focused on two dimensions of the portfolio grids … … Industry Attractiveness … Competitive Position
Where was Michael Porter coming from?
School of Economics …
… at Harvard …
Structural reasons why …
… some industries were profitable * Firm concentration * Established cost advantages * Product differentiation * Economies of scale
Structural reasons …
… all represented barriers to entry in certain industries, thus allowing those industries to be more profitable than others.
Porters Five Forces …
* Threat of Entry * Bargaining Power of Suppliers * Bargaining Power of Buyers * Development of Substitute Products or Services * Rivalry among Competitors
Barriers to Entry …
… large capital requirements or the need to gain economies of scale quickly. … strong customer loyalty or strong brand preferences. … lack of adequate distribution channels or access to raw materials. materials
Power of Suppliers …
… high when
* A small number of dominant, highly concentrated suppliers exists. * Few good substitute raw materials or suppliers are available. * The cost of switching raw materials or suppliers is high.
Power of Buyers …
… high when
* Customers are concentrated, large or concentrated buy in volume . * The products being purchased are standard or undifferentiated making it easy to switch to other suppliers. * Customers’ purchases represent a major portion of the sellers’ total revenue.
Substitute products …
… competitive strength high when
* The relative price of substitute products declines . * Consumers’ switching costs decline. decline * Competitors plan to increase market penetration or production capacity. capacity
Rivalry among competitors
… intensity increases