PORTER'S FIVE FORCE MODEL
INTRODUCTION:
Porter's five forces is a framework for the industry analysis and business
strategy development developed by Michael E. Porter of Harvard Business
School in 1979. It draws upon Industrial Organization (IO) economics to derive
five forces that determine the competitive intensity and therefore attractiveness
of a market. Attractiveness in this context refers to the overall industry
profitability. An "unattractive" industry is one in which the combination of
these five forces acts to drive down overall profitability. A very unattractive
industry would be one approaching "pure competition", in which available
profits for all firms are driven down to zero.
Porter's five forces include - three forces from 'horizontal' competition:
threat of substitute products, the threat of established rivals, and the threat of
new entrants; and two forces from 'vertical' competition: the bargaining power
of suppliers and the bargaining power of customers.
FORCES OF PORTER’S MODEL:
The threat of the entry of new competitors: Profitable markets that
yield high returns will attract new firms. This results in many new
entrants, which eventually will decrease profitability for all firms in the
industry. Unless the entry of new firms can be blocked by incumbents,
the profit rate will fall towards zero (perfect competition).
• The existence of barriers to entry (patents[1], rights, etc.) The most
attractive segment is one in which entry barriers are high and exit
barriers are low. Few new firms can enter and non-performing firms
can exit easily.
• Economies of product differences
• Brand equity
• Switching costs or sunk costs
• Capital requirements
• Access to distribution
• Customer loyalty to established brands
• Absolute cost advantages
• Learning curve advantages
• Expected retaliation by incumbents
• Government policies
• Industry profitability; the more profitable the industry the more
attractive it will be to new competitors
The intensity of competitive rivalry: For most industries, the intensity
of competitive rivalry is the major determinant of the competitiveness of
the industry.
• Sustainable competitive advantage through innovation
• Competition between online and offline companies; click-and-
mortar -v- slags on a bridge
• Level of advertising expense
• Powerful competitive strategy
The visibility of proprietary items on the Web used by a company which
can intensify competitive pressures on their rivals. How will competition react
to a certain behavior by another firm? Competitive rivalry is likely to be based
on dimensions such as price, quality, and innovation. Technological advances
protect companies from competition. This applies to products and services.
Companies that are successful with introducing new technology, are able to
charge higher prices and achieve higher profits, until competitors imitate them.
Examples of recent technology advantage in have been mp3 players and mobile
telephones. Vertical integration is a strategy to reduce a business' own cost and
thereby intensify pressure on its rival.
The threat of substitute products or services: The existence of
products outside of the realm of the common product boundaries
increases the propensity of customers to switch to alternatives:
• Buyer propensity to substitute
• Relative price performance of substitute
• Buyer switching costs
• Perceived level of product differentiation
• Number of substitute products available in the market
• Ease of substitution. Information-based products are more prone to
substitution, as online product can easily replace material product.
• Substandard product
• Quality depreciation
The bargaining power of customers (buyers): The bargaining power of
customers is also described as the market of outputs: the ability of
customers to put the firm under pressure, which also affects the
customer's sensitivity to price changes.
• Buyer concentration to firm concentration ratio
• Degree of dependency upon existing channels of distribution
• Bargaining leverage, particularly in industries with high fixed
costs
• 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
• Differential advantage (uniqueness) of industry products
• RFM Analysis
The bargaining power of suppliers: The bargaining power of suppliers
is also described as the market of inputs. Suppliers of raw materials,
components, labor, and services (such as expertise) to the firm can be a
source of power over the firm, when there are few substitutes. Suppliers
may refuse to work with the firm, or, e.g., charge excessively high prices
for unique resources.
• Supplier switching costs relative to firm switching costs
• Degree of differentiation of inputs
• Impact of inputs on cost or differentiation
• Presence of substitute inputs
• Supplier concentration to firm concentration ratio
• Employee solidarity (e.g. labor unions)
• Supplier competition - ability to forward vertically integrate and
cut out the buyer.
AVANTHI’S RESEARCH AND TECHNOLOGICAL ACADEMY
( RAVADA )
Marks awarded:
A
STUDY
ON
PORTER'S FIVE FORCE MODEL
IN
STRATEGIC MANAGEMENT
( 1ST MID MINI PROJECT-3RD SEM )
MASTER OF BUSINESS ADMINISTRATION
BY
SUNIL KUMAR
09HQ1EOO44
