ssuusues, 29:54 Ine Five Forees - insite For Strategy And Lompeuweness -rarvara business Scnoo! Harvard Business Schoo! INSTITUTE FOR STRATEGY & COMPETITIVENESS The Five Forces Threat of Substitute Products or Services Bargaining Power of Suppliers Bargaining Power of Buyers ‘Threat of New Entrants Rivalry Among Existing Competitors he Five Forces is framework for understanding the competitive forces at work in an industry, and which drive the way economic value * divided among industry actors. irst described by Michael Porter in his classic 1979 Harvard Business Review article, Porter's insights started a revolution in the strategy eld and continue to shape business practice and academic thinking today. A Five Forces analysis can help companies assess industry ttractiveness, how trends will affect industry competition, which industries a company should compete in—and haw companies can ‘sition themselves for success, heat of New Entrants he threat of new entrants into an industry can force current players to keep prices down and spend more to retain customers. Actually, niry brings new capacity and pressure on prices and costs. The threat of entry, therefore, puts @ cap on the profit potential of an industry. his threat depends on the size of a series of barriers to entry including economies of scale, to the cost of building brand awareness, to ‘ccessing distribution channels, to government restrictions. he threat of entry also depends on the capabilties ofthe ikely potential entrants. If there are well established companies in the industry Perating in other geographic regions, for example, the threat of entry rises. argaining Power of Suppliers ‘ompanies in every industry purchase various inputs from suppliers, which account for differing proportions of cost, Powerful suppliers ‘an use their negotiating leverage to charge higher prices or demand more favorable terms from industry competitors, which lowers dustry profitably. If there are only one or two suppliers of an essential input product, for example, or if switching suppliers is expensive + time consuming, a supplier group wields more power. hreat of Substitute Products, Services substitute is another product or service that meets the same underlying need thatthe industry's product meets in a different way. Ideoconferencing is a substitute for travel, Email is @ substitute for express mail. he threat of a substitute is high ift offers an attractive price-performance trade-off versus the industry's product, especialy if the buyer's ‘ost of switching to the substitute is low. {vary Among Existing Competitors rivalry is intense, it drives down prices or dissipates profit by raising the cost of competing. Companies compete away the value they reate. Rivalry tends to be especially ferce i Competitors are numerous or are roughly equal in size and market position Industry growth is slow There are high fixed costs, which create incentives for price cutting Exit barriers are high Rivals are highly commited to the business Firms have differing goals, diverse approaches to competing, or lack familiarity with one anothersusie, 2398 Ine rive Forces - nsttute ror Stategy And Lompetveness-narvar Business Schot Key Industry Structure Concepts Every industy is ferent, bu the undoing ever of profitably are the same in every industy Share This: ‘The Five Forces determine the competitive structure of an industry, and its profitabilty. Industry structure, together with a company’s relative position within the industry, are the two basic drivers of company profitability. ‘Share This: ‘Analyzing the Five Forces can help companies anticipate shifts in competition, shape how industry structure evolves, and find better strategic positions within the industry. ‘Share This: How the Five Forces Work To Bargaining Power of Buyers Bargaining Power of Buyers — HIGH Ponertal castomars can vate clot fee ras Despite the fagmetation of tars atin havea hand owmar demand mote sevice sexstng pices the ime derertating temsalves and ceatng customer ‘opting moe value far temclven. Buper powers loyally, sithing east fr bgers are neatly Inpho wen boys re ange relative of competion moment andthe raration of tage aiines faring Sem, products ee unaerated end epesent Uemines pice ives ES igntcont coat forthe bape, an te ae few ‘9 another. Tey can play als against each cter~especaly if an idusi’s products ae ior, i's nxpanai sich loyalties and Free rungs quali Ter maybe multiple taper segments na gion sty wih etn eal of power Bargaining Power of Suppliers Bargaining Power of Supplirs — HIGH Companies in every indsty ptcase vanous inputs tom ‘he major supler groups tothe ating industy a aca “Sipps, whch account orden poprtons of cost orgies ports, ate suppl. Each of he maar Power sippien can wa thir regoating evra © cipro are highly concord a has hug lo age niet prees ar demand mete avrabs tts Aitinesafen fae igh cose swichng suppers because from inst compet, whe les indy ofthe Dents of fae ampatilty andthe neces at Frosty Iter arm only an ota splosf n wing majoras ‘Ssemal input peau fer example, ori swching ‘tpl lseapenave ome consumig, © super rp wl ore pone Threat of New Entrants Threat of New Entrants — HIGH Te that of ne entrants int an indy em rca ‘hatin nts cantina to gow. Tha cost of ays current players to kegp pices down ae spend mare to iow wth ead) acces ate and facing, Fea customers. Act erry igs Hew eapac) ad ‘lal of sillod pont, and access to gates. A Fressre on pices anh costs. Te that ny sea seam of ew aitinas seed the nesty ‘ertre, puts cap on the po potential of an industy. fer ho last saveal decades. New arias ofan have Tis thea depends on the sz af 2 sees of baer a ‘tvenages deo lse seit prema, wich ent, inluaing ecoramies a scale to he cet of loners wages, and ewer ara with greeter Ne Tuiling rand awareness to accessing ttn selene, Te thea fey aso depos onthe apaitios at the likey pon eians tee ar well established Companies inthe Indust oprating in other seca Fegan, far example, te Meat of ery tes ‘Threat of Substitute Products or Services Threat of Substitute Products or Services — LOW When anew product or senica meets he sam ta ‘There is no atectie subst fr ar ave,espacialy eeconfreneing i siti fr av. Ema 3 rei arab, bso ai tae subst fr apse all. Te that of ssi is igh fit ofere an atractive pce peromance trade-af relative he inausty’s Pout or te baer costo etching othe substssuusues, 29:54 Ine Five Forees - insite For Strategy And Lompeuweness -rarvara business Scnoo! Rivalry Among Existing Competitors Rivalry Among Existing Competitors — HIGH Read full analysis on International Air Transport Association Vision 2050 Industry Structure is Dynamic Industry structure changes over time, and is not static. Over time, buyers or suppliers can become more or less powerful. Technological «or managerial innovations can make new entry of substitution more o less likely. Changes in regulation can change the intensity of ‘vary, oF affect barirs to entry. Choices by competition, such as new pricing or distribution approaches, can also affect the path of industy competion. Five Forces analysis is essential to anticipate and exploit industry structural change. Related Resources + 01 Jan 2008 ‘+ Harvard Business Review ‘The Five Competitive Forces That Shape Strategy, by Michael E. Porter + 16 Dec 2012 ‘+ Harvard Business Schoo! Publishing Understanding Michael Porter: The Essential Guide to Competition and Strategy, by Joan Magretta + 09 Sep 2008 + Harvard Business School Publishing ‘On Competition, Undated and Expanded Eution by Michael E, Porter