Five-Forces U Shah

“Get Smarter, Faster”
Analyzing Competitive Forces

Using Michael Porter’s
“Five Forces” Analysis
Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

First, let’s look at the model

Then, define each of the model’s

“Five Forces”

We’ll then see Porter’s 3

Recommended Strategies to
Outperform Competitors
…and finally, what is

meant by “Strategic Fit”

“Five Forces” - Explained

• The Analysis provides a framework to analyze the
forces that reduce the profits of an industry.
• The Analysis focuses on whether or not a force is
sufficiently strong to reduce or eliminate the profit
of an industry.
• The Model has the following limitations:
– It doesn’t account for the magnitude of demand
– The model focuses on an industry as a whole – not on
individual firms
– The industry and the markets must be well defined
• The stronger these forces are, the more likely the
profits will be less for the particular industry.
Michael Porter’s
“Five Forces” Analysis Model
Potential
Entrants
Threat of New
Entrants
Industry
Competitors
Bargaining Power Bargaining Power
Industry of Suppliers of Buyers Buyers
Suppliers
Rivalry among
existing firms
Threat of
Substitute Products
and /or Services
Substitutes Adapted from M.E. Porter,
Competitive Strategy, Free Press, 1980.

Intensity of Rivalry among
existing companies
• Numerous or equally balanced competitors
• Slow industry growth
• High fixed or storage costs
• Lack of differentiation or switching costs
• Capacity augmented in large increments
• Diverse competitors
• High strategic stakes
• High exit barriers
Threat of Potential Entrants

• Barriers to entry caused by:
– Economies of scale
– Product differentiation
– Capital requirements
– Switching costs
– Access to distribution channels
– Cost disadvantages independent of scales
• Proprietary technology, R&D and/or patents
• Favorable access to raw materials
• Learning curve
• Government subsidies
• Favorable locations
– Government policy
Bargaining Power of Buyers

• Buyer purchases large volumes relative to the
seller sales
• Buyer purchases are a significant portion of the
buyer’s total costs
• The product it purchases from the industry are
standard or undifferentiated
• Face few switching costs
• Product is unimportant to the quality of the
buyers’ products or services
• Buyer has full information

Threat of Substitute
Products and Services
• Relative Price of substitute
• Relative Quality of substitute
• Switching costs to buyers

Bargaining Power of Suppliers

• Few suppliers – supplier concentration
• Not obliged to contend with other substituted products
• Industry is not an important customer of the supplier
group
• Suppliers product is an important input to the buyers
business
• The supplier groups products are differentiated or it has
built up switching costs
• The supplier group poses a credible threat of forward
integration
• The supplier group poses a credible threat of backward
integration
Porter Recommends 3 Generic Strategies to

Outperform Competitors
1. Overall cost leadership:
– Produce same/better quality at less cost than anyone
else.
– Enjoy greater profits.
– Or, in a price war – stay in profitably with reduced
prices.
2. Differentiation: equating products with desirable quality
standards.
3. Market Niche Segmentation: focusing on a section or
group of an industry or market, a segment of a product line
or a geographical segment.
Source: "What Is Strategy?" by Michael E. Porter, Harvard Business Review, Volume 74, Number 6, pp 61 - 78.

Strategic Positioning – 3 Ways

• Variety based Positioning - can be based on producing a
subset of an industry's products or services.
• Needs-based positioning - serving the needs of a particular
customer group.
• Accessed-based positioning segmenting customers who are
accessible in different ways.

Strategic Fit Sustains

Competitive Advantage
“Strategy is creating fit among a company's
activities. The success of a strategy depends on
doing many things well -- not just a few -- and
integrating among them. If there is no fit among
activities, there is no distinctive strategy and little
sustainability.”


Competitive Advantage
• Strategic fit among many activities is fundamental not only
to competitive advantage but also to the sustainability of
that advantage.
• It is harder for a rival to match an array of interlocked
activities than it is merely to imitate a particular sales-
force approach, match a process technology, or replicate a
set of product features.
• Positions built on activity systems are more sustainable
than those built on individual activities.
• Finally, fit among a company's activities creates pressures
and incentives to improve operational effectiveness, which
makes imitation even harder.

Competitive Advantage (Cont’d)
• Fit means that poor performance in one activity will
degrade the performance in others, so that weaknesses are
exposed and more prone to get attention. Conversely,
improvements in one activity will pay dividends in others.
• Companies with strong fit among their activities are rarely
inviting targets. Their superiority in strategy and in
execution only compounds their advantages and raises the
hurdle for imitators.
For more information

• See the Competitive Intelligence Center’s
Toolbox (in the drop down menu) and
Library sections
• Visit the Society for Competitive
Intelligence Web Site http://www.scip.org
• Contact Affinity Matrix, L.L.C. at
bill@affinitymatrix.com

Additional Recommended Reading:

“Strategic and Competitive Analysis”, Methods and Techniques for
analyzing business intelligence, by Craig S. Fleisher and Babette E.
Bensoussan, Prentice Hall, 2003.
“Proven Strategies in Competitive Intelligence”, John E. Prescott and
Stephen Miller, John Wiley & Sons, 2001
"What Is Strategy?" by Michael E. Porter, Harvard Business Review,

Volume 74, Number 6, pp 61 - 78.
“Competitive Strategy”, By Michael E. Porter Free Press, 1980

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“Get Smarter, Faster”

Analyzing Competitive Forces

Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

First, let’s look at the model

Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

Then, define each of the model’s

Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

We’ll then see Porter’s 3

…and finally, what is

Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

“Five Forces” - Explained

Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

Threat of Potential Entrants

Bargaining Power of Buyers

Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

Bargaining Power of Suppliers

Porter Recommends 3 Generic Strategies to

Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

Strategic Positioning – 3 Ways

Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

Strategic Fit Sustains

Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

Strategic Fit Sustains

Strategic Fit Sustains

For more information

Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

Additional Recommended Reading:

"What Is Strategy?" by Michael E. Porter, Harvard Business Review,

“Competitive Strategy”, By Michael E. Porter Free Press, 1980

Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

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