Porter's Five Forces

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Michael Porters Five Forces Model
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Michael Porter

• An industrys profit potential is largely
  determined by the intensity of competitive
  rivalry within that industry.

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Porters Five Forces
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Portfolio Analysis

• Strategy at the time (1970s) was focused on two
  dimensions of the portfolio grids
• Industry Attractiveness
• Competitive Position

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Business Strength Matrix
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Where was Michael Porter coming from?
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School of Economics

• at Harvard
• Exposed Porter to the Industrial Organization
  (I0) sub-field of Economics.

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Structural reasons why

• some industries were profitable
• Firm concentration
• Established cost advantages
• Product differentiation
• Economies of scale

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Structural reasons

• all represented barriers to entry in certain
  industries, thus allowing those industries to
  be more profitable than others.

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But Economists

• generally concerned them-selves with the
  minimization rather than maximization of what
  they viewed as excess profits (i.e., Public
  Policy).

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Business policy objective

• of profit maximization
• Porter developed his elaborate framework for
  the structural analysis of industry
  attractive-ness within the framework of Business
  Policy.

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Michael Porter

• By using a framework rather than a formal
  statistical model, Porter identified the relevant
  variables and the questions that the user must
  answer in order to develop conclusions tailored
  to a particular industry and company.

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Porters Five Forces

• Threat of Entry
• Bargaining Power of Suppliers
• Bargaining Power of Buyers
• Development of Substitute Products or
  Services
• Rivalry among Competitors

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Barriers to Entry

• large capital requirements or the need to gain
  economies of scale quickly.
• strong customer loyalty or strong brand
  preferences.
• lack of adequate distribution channels or
  access to raw materials.

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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.

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Power of Buyers

• high when
• Customers are concentrated, large or 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.

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Substitute products

• competitive strength high when
• The relative price of substitute products
  declines .
• Consumers switching costs decline.
• Competitors plan to increase market penetration
  or production capacity.

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Rivalry among competitors

• intensity increases as
• The number of competitors increases or they
  become equal in size.
• Demand for the industrys products declines or
  industry growth slows.
• Fixed costs or barriers to leaving the
  industry are high.

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Summary

• As rivalry among competing firms intensifies,
  industry profits decline, in some cases to the
  point where an industry becomes inherently
  unattractive.

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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, and this
  creates a barrier to entry, as new competitors
  with no experience face higher costs than
  established ones.

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However

• If a new entrant has built the newest, most
  efficient plant, it will not have to 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.

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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 new entrants can alight as they enter the
  market .

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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).

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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, strategies
  and resources.

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Industry Product Life Cycles
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Industry Product Life Cycles

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Bright Horizons (12 months)