School of Economics … … at Harvard …… Exposed Porter to theIndustrial 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 them- selves with the minimization rather than maximization of what they viewed as excess profits (i.e., Public Policy).
Business policy objective … of profit maximizationPorter developed his elaborateframework for the structuralanalysis of industry attractive-ness within the framework ofBusiness Policy.
Michael Porter …By using a framework rather thana formal statistical model, Porter modelidentified the relevant variablesand the questions that the usermust answer in order to developconclusions tailored to a particularindustry 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.… 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 penetration or production capacity. capacity
Rivalry among competitors … intensity increases as* The number of competitors increases or they become equal in size. size* Demand for the industry’s products declines or industry growth slows. slows* Fixed costs or barriers to leaving the industry are high. high
Summary …As rivalry among competingfirms intensifies, industry intensifiesprofits decline, in some declinecases to the point where anindustry becomes inherentlyunattractive.unattractive
The Experience Curve … … as an entry barrierUnit costs associated witheconomies of scale, the learningcurve for labor, and capital-laborsubstitution decline with“experience,” and this creates a experiencebarrier to entry, as new competitors entrywith no “experience” face highercosts than established ones.
However …… If a new entrant has built the newest, most efficient plant, it will not have to “catch up.” 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 benullified by product or processinnovations that create an entirelynew experience curve – one towhich leaders may be poorlypositioned to jump, but to which jumpnew entrants can alight as theyenter the market .
Strategic Groups …Firms that face similar threats oropportunities in an industry butwhich differ from the threats andopportunities faced by othersets of firms in the sameindustry (e.g., in the beverageindustry: soft drinks groupversus alcoholic beverages).
Strategic Groups …Rivalry generally is moreintense within strategic groupsthan between them becausemembers of the same groupfocus on the same marketsegments with similar products, productsstrategies and resources. resources