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 themselves 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 attractiveanalysis of industry attractiveness within the framework of Business 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.

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. 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 large or concentrated, 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 capacity. penetration or production capacity

Rivalry among competitors

intensity increases as
* The number of competitors increases or they become equal in size size. * Demand for the industrys 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 industry intensifies, profits decline in some decline, 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 as new competitors entry, 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 catch 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 which jump, 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)