Porter's five forces analysis is a framework for industry analysis and business strategy development formed
by Michael E. Porter
Five forces
Threat of new competition
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.
The existence of barriers to entry (patents, 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
Industry profitability; the more profitable the industry the more attractive it will be to new competitors.
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. Note that this should not be confused with competitors' similar products but entirely different ones instead. For example, tap
water might be considered a substitute for Coke, whereas Pepsi is a competitor's similar product. Increased marketing for drinking tap water
might "shrink the pie" for both Coke and Pepsi, whereas increased Pepsi advertising would likely "grow the pie" (increase consumption of all
soft drinks), albeit while giving Pepsi a larger slice at Coke's expense.
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
[edit]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 switching costs relative to firm switching costs
Buyer information availability
Availability of existing substitute products
Buyer price sensitivity
Differential advantage (uniqueness) of industry products
RFM Analysis
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
Strength of distribution channel
Supplier concentration to firm concentration ratio
Employee solidarity (e.g. labor unions)
Supplier competition - ability to forward vertically integrate and cut out the BUYER
Ex.: If you are making biscuits and there is only one person who sells flour, you have no alternative but to buy it from him.
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
Level of advertising expense
Powerful competitive strategy
Flexibility through customization, volume and variety
