School of Economics …
… at Harvard …
… Exposed Porter to the
Industrial 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 themselves with the minimization
rather than maximization of
what they viewed as excess
profits (i.e., Public Policy).
Business policy objective
… of profit maximization
Porter developed his elaborate
framework for the structural
analysis of industry attractiveness within the framework of
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.
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
… strong customer loyalty or strong
… lack of adequate distribution
channels or access to raw 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
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
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.
Rivalry among competitors
… intensity increases
* The number of competitors increases
or they become equal in size.
* Demand for the industry’s products
declines or industry growth slows.
* Fixed costs or barriers to leaving the
industry are high.
As rivalry among competing
firms intensifies, industry
profits decline, in some
cases to the point where an
industry becomes inherently
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.
… 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.
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 .
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).
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.