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Five forces model for industry analysis by Theorem Solutions
- 1. Five Forces Model for Industry Analysis By Michael Porter
- 2. Introduction • 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.
- 4. Bargaining Power of Buyers 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
- 5. Bargaining Power of Suppliers • Supplier bargain to charge higher prices or more favorable terms. The power of a supplier is governed by .. oRelative size of supplier to buyer oAlternatives oSwitching costs oVertical Integration
- 6. Threat of Substitute product or Services • 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
- 7. Rivalry among Existing Players • 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
- 8. Threat of New Entrants • 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
- 9. Impact of Five Forces on Profitability
- 10. Conclusion • 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.