Michael Porter developed the Five Forces framework to analyze industry attractiveness and profitability. The five competitive forces are the threat of new entry, bargaining power of suppliers, bargaining power of buyers, threat of substitute products, and rivalry among existing competitors. Porter's framework identifies structural factors that determine the intensity of competition in an industry and profitability. These include barriers to entry, power of suppliers and buyers, threat of substitutes, and intensity of rivalry.

1. Michael Porter’s
Five Forces
Model

2. Michael Porter …
“An industry’s profit potential
is largely determined by the
intensity of competitive
rivalry within that industry.”

3. Porter’s Five Forces

4. Portfolio Analysis …
… Strategy at the time (1970s)
was focused on two dimensions
of the portfolio grids …
… Industry Attractiveness
… Competitive Position

5. Business Strength Matrix

6. Where was
Michael Porter
coming from?

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

8. Structural reasons why …
… some industries were profitable
* Firm concentration
* Established cost advantages
* Product differentiation
* Economies of scale

9. Structural reasons …
… all represented barriers to
entry in certain industries,
thus allowing those
industries to be more
profitable than others.

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

11. 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.

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

13. Porters Five Forces …
* Threat of Entry
* Bargaining Power of Suppliers
* Bargaining Power of Buyers
* Development of Substitute
Products or Services
* Rivalry among Competitors

14. 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

15. 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.

16. 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.

17. 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

18. 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

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

20. 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
experience
barrier to entry, as new competitors
entry
with no “experience” face higher
costs than established ones.

21. 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.

22. 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
jump
new entrants can alight as they
enter the market .

23. 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).

24. 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,
products
strategies and resources.
resources

25. Industry & Product
Life Cycles