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Porter five forces analysis
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A graphical representation of Porter's Five Forces Porter's Five Forces is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979. It draws upon Industrial Organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven down to zero. Three of Porter's five forces refer to competition from external sources. The remainder are internal threats. Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally, requires a business unit to re-assess the marketplace given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models, have been able to make a return in excess of the industry average.

which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents. and the threat of new entrants.2 The threat of substitute products or services o 1. rights.[citation needed] Porter developed his Five Forces analysis in reaction to the then-popular SWOT analysis.1 The threat of the entry of new competitors o 1. This five forces analysis.three forces from 'horizontal' competition: threat of substitute products. is just one part of the complete Porter strategic models. and two forces from 'vertical' competition: the bargaining power of suppliers and the bargaining power of customers. the threat of established rivals. which he found unrigorous and ad hoc. The other elements are the value chain and the generic strategies.3 The bargaining power of customers (buyers) o 1.Porter's five forces include . Economies of product differences Brand equity Switching costs or sunk costs Capital requirements Access to distribution . etc.[1] Contents [hide]        1 The five forces o 1.4 The bargaining power of suppliers o 1.5 The intensity of competitive rivalry 2 Usage 3 Criticisms 4 See also 5 References 6 Further reading 7 External links [edit] The five forces [edit] The threat of the entry of new competitors Profitable markets that yield high returns will attract new firms. This results in many new entrants. Few new firms can enter and nonperforming firms can exit easily.       The existence of barriers to entry (patents.) The most attractive segment is one in which entry barriers are high and exit barriers are low. the abnormal profit rate will tend towards zero (perfect competition).

[edit] The threat of substitute products or services The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives:         Buyer propensity to substitute Relative price performance of substitute Buyer switching costs Perceived level of product differentiation Number of substitute products available in the market Ease of substitution. Information-based products are more prone to substitution.            Buyer concentration to firm concentration ratio Degree of dependency upon existing channels of distribution Bargaining leverage. as online product can easily replace material product.g. e. when there are few substitutes. components.. labor.  Supplier switching costs relative to firm switching costs . particularly in industries with high fixed costs Buyer volume Buyer switching costs relative to firm switching costs Buyer information availability Ability to backward integrate Availability of existing substitute products Buyer price sensitivity Differential advantage (uniqueness) of industry products RFM Analysis [edit] The bargaining power of suppliers The bargaining power of suppliers is also described as the market of inputs. Suppliers may refuse to work with the firm. Substandard product Quality depreciation [edit] The bargaining power of customers (buyers) The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure. which also affects the customer's sensitivity to price changes. or. Suppliers of raw materials. the more profitable the industry the more attractive it will be to new competitors. charge excessively high prices for unique resources.   Customer loyalty to established brands Absolute cost Industry profitability. and services (such as expertise) to the firm can be a source of power over the firm.

the framework is only a starting point or "checklist" they might use " Value Chain " afterward. and each line of business . This applies to products and services. Vertical integration is a strategy to reduce a business' own cost and thereby intensify pressure on its rival. for most consultants.      Sustainable competitive advantage through innovation Competition between online and offline companies Level of advertising expense Powerful competitive strategy The visibility of proprietary items on the Web[2] used by a company which can intensify competitive pressures on their rivals. you have no alternative but to buy it from him. more basic level: a market in which similar or closely related products and/or services are sold to buyers. at a minimum.g.) A firm that competes in a single industry should develop. [edit] The intensity of competitive rivalry For most industries. one five forces analysis for its industry. (See industry information. it is not designed to be used at the industry group or industry sector level. labor unions) Supplier competition . and innovation... How will competition react to a certain behavior by another firm? Competitive rivalry is likely to be based on dimensions such as price. quality. [edit] Usage Strategy consultants occasionally use Porter's five forces framework when making a qualitative evaluation of a firm's strategic position. Technological advances protect companies from competition. until competitors imitate them. an analysis that uses it to the exclusion of specifics about a particular situation is considered naїve. If you are making biscuits and there is only one person who sells flour.ability to forward vertically integrate and cut out the BUYER Ex. An industry is defined at a lower. the first fundamental issue in corporate strategy is the selection of industries (lines of business) in which the company should compete.       Degree of differentiation of inputs Impact of inputs on cost or differentiation Presence of substitute inputs Strength of distribution channel Supplier concentration to firm concentration ratio Employee solidarity (e. Porter makes clear that for diversified companies. Like all general frameworks. However. Examples of recent technology advantage in have been mp3 players and mobile telephones. According to Porter. Companies that are successful with introducing new technology. the intensity of competitive rivalry is the major determinant of the competitiveness of the industry. are able to charge higher prices and achieve higher profits. the five forces model should be used at the line-of-business industry level.

It is thus argued[citation needed] that this theory be coupled with the Resource-Based View (RBV) in order for the firm to develop a much more sound strategy. Using game theory. [3] An important extension to Porter was found in the work of Adam Brandenburger and Barry Nalebuff in the mid-1990s. whilst consulting at Groupe Bull. That uncertainty is low. Coyne [1] and Somu Subramaniam have stated that three dubious assumptions underlie the five forces:    That buyers. former CEO of Intel Corporation.000 company competes in approximately 52 industries (lines of business). According to most references. they added the concept of complementors (also called "the 6th force"). five forces analysis. industry-specific. The idea that complementors are the sixth force has often been credited to Andrew Grove. Martyn Richard Jones. by referring to innovation. This model was the result of work carried out as part of Groupe Bull's Knowledge Asset Management Organisation initiative. and suppliers are unrelated and do not interact and collude. allowing participants in a market to plan for and respond to competitive behavior. [edit] Criticisms Porter's framework has been challenged by other academics and strategists such as Stewart Neill.[4] It is also perhaps not feasible to evaluate the attractiveness of an industry independent of the resources a firm brings to that industry. competitors. Porter indirectly rebutted the assertions of other forces. government.should develop its own. It is based on Porter's model and includes Government (national and regional) as well as Pressure Groups as the notional 6th force. developed an augmented 5 forces model in Scotland in 1993. the sixth force is government or the public. That the source of value is structural advantage (creating barriers to entry). Similarly. The average Global 1. [edit] See also        Delta Model Six Forces Model National Diamond Value chain Porter's Four Corners Model Industry classification Nonmarket forces [edit] References . helping to explain the reasoning behind strategic alliances. and complementary products and services as "factors" that affect the five forces. the likes of Kevin P.

org/wiki/Porter_five_forces_analysis" View page ratings Rate this page What's this? Trustworthy Objective Complete Well-written . "The Five Competitive Forces that Shape Strategy". January 2008. Hoskisson.E. (2009). January. SOUTH WESTERN. Harvard Business Review. (1979) How Competitive Forces Shape Strategy. 2009. Kotler Philip. New York. No.86-104. ^ Michael Porter. (2008) The Five Competitive Forces That Shape Strategy.Strategy Safari 1998. Porter. pp 38-39). [edit] External links Wikimedia Commons has media related to: Porter's Five Forces Model Retrieved from "http://en. Ahlstrand and Lampel. PDF [edit] Further reading         Coyne. Porter. 1996.wikipedia. M.P. The Academy of Management Executive 16:2:44 at JSTOR 2. Wiley 3. Rainer and Turban. The McKinsey Quarterly. Inc. THE MLKINSEY QUARTERLY. pp 36– 41. Number 4. Information systems and the modern organisation. 1997 Mintzberg. In Introduction to information systems ( 2nd Edition. Coyne and Somu Subramaniam. 1980.Bringing discipline to strategy.E. Harvard business Review. ^ Kevin P. Marketing Management. 2008. (1980) Competitive Strategy. K. p. Ch 2. ^ Rainer and Turban. Free Press. and Sujit Balakrishnan (1996). March/April 1979.4. Understanding Business Strategy. Porter. Porter. 14-25 4. Harvard business Review. Introduction to Information Systems second edition.E. Nicholas Argyres. Anita M. ^ Michael E. pp. M. Prentice-Hall. Wiley. "An Interview with Michael Porter".1. Ireland. M. McGahan.

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