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
Business Strength Matrix
 Where was
Michael Porter
coming from?
School of Economics …
… at Harvard …
… Exposed Porter to the
Industrial Organization (I0)
sub-field of Economics.
 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.
 But Economists …
… generally concerned them-
selves with the minimization
rather than maximization of
what they viewed as excess
profits (i.e., Public Policy).
 Business policy objective
… of profit maximization
Porter developed his elaborate
framework for the structural
analysis of industry attractive-
ness within the framework of
Business Policy.
 Michael Porter …
By using a framework rather than
a formal statistical model,
model Porter
identified the relevant variables
and the questions that the user
must answer in order to develop
conclusions tailored to a particular
industry and company.
 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,
concentrated large or 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 as
* The number of competitors increases or
they become equal in size.
size
* Demand for the industry’s products
declines or industry growth slows.
slows
* Fixed costs or barriers to leaving the
industry are high.
high
 Summary …
As rivalry among competing
firms intensifies,
intensifies industry profits
decline,
decline in some cases to the
point where an industry becomes
inherently unattractive.
unattractive
 The Experience Curve …
… as an entry barrier
Unit costs associated with economies of
scale, the learning curve for labor, and
capital-labor substitution decline with
“experience,”
experience and this creates a barrier to
entry,
entry as new competitors with no
“experience” face higher costs than
established ones.
 However …
… If a new entrant has built the newest,
most efficient plant, it will not have to
“catch up.”
up
… Technical advances purchased by new
entrants – free from the legacy of heavy
past Investments – may provide those
companies a cost advantage over the
leaders.
 In addition …
The experience curve barrier can be
nullified by product or process
innovations that create an entirely new
experience curve – one to which leaders
may be poorly positioned to jump,
jump but to
which new entrants can alight as they
enter the market .
 Strategic Groups …
Firms that face similar threats or
opportunities in an industry but
which differ from the threats and
opportunities faced by other sets of
firms in the same industry (e.g., in
the beverage industry: soft drinks
group versus alcoholic beverages).
 Strategic Groups …
Rivalry generally is more intense
within strategic groups than between
them because members of the same
group focus on the same market
segments with similar products,
products
strategies and resources.
resources
Industry & Product
Life Cycles
Industry & Product
Life Cycles
Bright Horizons (12 months)