PORTERS FIVE FORCES MODEL

Sovan Mangaraj
Innovation The B-School
sovan@ibschool.org.in

SESSION DETAILS
Introduction to the Topic Michael E. Porters Five Forces Model

The Five Competitive Forces - Threat of New Entrants

- Internal Rivalry - Threat of Substitutes - Bargaining Power of Buyers - Bargaining Power of Suppliers

Conclusion

INTRODUCTION
Porters Five Forces is a framework for the industry analysis and business strategy development.

Developed by Michael E. Porter of Harvard Business School in 1979, the model is used as a technique for external environment scanning. According to Porter, there are Five Forces that determine the competitive intensity and therefore attractiveness of a market.

THREAT OF NEW ENTRANTS

Threat from new entrants high in an industry in which the entry and exit of new players are free.

Barriers to entry - Initial capital requirement - Economies of scale - Access to intermediaries/inputs - Government policies - Product differentiation

INTERNAL RIVALRY
The industry concentration or the number of business units operating within a particular industry indicates the amount of rivalry.

Rivalry intensified when - Less differentiation between existing players

- Whole economy is in downturn - Less substitute products available - No forward/backward integration

Strategies for gaining advantage - Differentiating products

- Price differentiation

THREAT OF SUBSTITUTES
The price that a company can charge from its customers is restricted by the price of substitutes. Effects of substitutes - Large number of substitutes, lower entry barrier
- Less product differentiation, higher threat

BARGAINING POWER OF BUYERS

bargaining power of buyers is determined by the industry in which the firm is operating.
The

Bargaining power higher when - Many suppliers & a few large buyers - Buyers purchase in large quantities - Buyers purchase constitute a major chunk of the product - Buyers threat to backward integrate

BARGAINING POWER OF SUPPLIERS

When there are only a few suppliers in the market and many buyers, the suppliers can get together and decide on the price which is most profitable to them.

Suppliers are powerful when - Higher number of buyers & few sellers - Product sold has few substitutes & important for the buyer - No single industry is a major customer - Threat of forward integration - Incapability of buyers to backwardly integrate

CONCLUSION
According to Porter, a firm that competes in a single industry should develop, at a minimum, one five forces analysis for its industry. Porter makes clear that for diversified companies, the first fundamental issue in corporate strategy is the selection of industries (lines of business) in which the company should compete; and each line of business should develop its own, industry-specific, five forces analysis.