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Porter's Five Forces Model
Porter's Five Forces Model
Michael Porter
An industrys profit potential is largely determined by the intensity of competitive rivalry within that industry.
Portfolio Analysis
Strategy at the time (1970s) was focused on two dimensions of the portfolio grids Industry Attractiveness Competitive Position
School of Economics
at Harvard Exposed Porter to the Industrial Organization (I0) sub-field of Economics.
Structural reasons
all represented barriers to entry in certain industries, thus allowing those industries to be more profitable than others.
But Economists
generally concerned themselves with the minimization rather than maximization of what they viewed as excess profits (i.e., Public Policy).
Michael Porter
By using a framework rather than a formal statistical model, Porter model identified the relevant variables and the questions that the user must answer in order to develop conclusions tailored to a particular industry and company.
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
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
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
Summary
As rivalry among competing firms intensifies, industry intensifies profits decline, in some decline cases to the point where an industry becomes inherently
as an entry barrier
Unit costs associated with economies of scale, the learning curve for labor, and capital-labor substitution decline with experience, and experience this creates a barrier to entry, entry as new competitors with no
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, but to jump 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
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