Describes how Five forces analysis can help SME's take the right decisions for the business growth.

1. By Michael Porter
Theorem Solutions – Simplifying Business Management

2.  Model developed in 1979
 Model developed in response to SWOT analysis
 Used as a Qualitative evaluation of company’s strategic position
 Five forces explain industry’s average prices and costs and hence average industry
profitability that a company needs to beat.
Theorem Solutions – Simplifying Business Management

3. Theorem Solutions – Simplifying Business Management

4. Price Sensitive when the Product or
Service is ..
 Undifferentiated
 Expensive related to other costs
 Inconsequential
Price insensitive when the product or
service is ..
 Highly differentiated
 Inexpensive related to other costs
 Consequential
Theorem Solutions – Simplifying Business Management

5.  Supplier bargain to charge higher prices or more favorable terms. The power of a
supplier is governed by ..
o Relative size of supplier to buyer
o Alternatives
o Switching costs
o Vertical Integration
Theorem Solutions – Simplifying Business Management

6.  They are products or services that meet the same basic need of an industries product
in a different way. Not being direct rivals substitutes are difficult to anticipate and can
have an industry changing effect.
 A key influence point for a substitute is the switching cost, note this cost could be in
the form of not just direct price but also convenience
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7.  Increasing rivalry among existing players could compete away their value by passing
it out to customers or dissipating it in higher costs of competing.
 Rivalry can be in the form of..
a) Price Competition
b) Advertising
c) New products
d) Increase in Customer service
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8.  Entry barriers protect an industry from new companies who would affect the remaining
forces. A new entrant could
o Give buyers & suppliers more choice
o Could develop a substitute product or service
o Start a price war
Theorem Solutions – Simplifying Business Management

9. Theorem Solutions – Simplifying Business Management

10.  Each of the five forces has a clear, direct and predictable relationship to industry
profitability.
 The basic rule to understand is that the more powerful the force the more pressure on
prices or cost or both.
Theorem Solutions – Simplifying Business Management