The purpose of Porter's five forces analysis is to assess the competitive environment in an industry and diagnose the principal competitive pressures. The five forces include the threat of new entrants, the bargaining power of suppliers and buyers, the threat of substitute products, and rivalry among existing competitors. Analyzing these forces helps understand the attractiveness of an industry and its profitability.

1. The purpose of
Five-Forces Analysis
• The five forces are environmental
forces that impact on a company’s
ability to compete in a given market.
• The purpose of five-forces analysis is to
diagnose the principal competitive
pressures in a market and assess how
strong and important each one is.
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2. Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
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3. Threat of New Entrants
Economies of Scale
Barriers to Product Differentiation
Entry Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent
of Scale
Government Policy
Expected Retaliation
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4. Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
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5. Bargaining Power of Suppliers
Suppliers are likely to be powerful if:
Supplier industry is dominated by a
Suppliers exert power
few firms
in the industry by:
Suppliers’ products have few substitutes
* Threatening to raise
prices or to reduce quality Buyer is not an important customer to
supplier
Powerful suppliers
can squeeze industry Suppliers’ product is an important
profitability if firms input to buyers’ product
are unable to recover
cost increases Suppliers’ products are differentiated
Suppliers’ products have high
switching costs
Supplier poses credible threat of
forward integration
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6. Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining Bargaining
Power of Power of
Suppliers Buyers
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7. Bargaining Power of Buyers
Buyer groups are likely to be powerful if:
Buyers are concentrated or purchases
are large relative to seller’s sales Buyers compete
Purchase accounts for a significant with the supplying
fraction of supplier’s sales industry by:
Products are undifferentiated * Bargaining down prices
Buyers face few switching costs * Forcing higher quality
* Playing firms off of
Buyers’ industry earns low profits each other
Buyer presents a credible threat of
backward integration
Product unimportant to quality
Buyer has full information Ch2

8. Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining Bargaining
Power of Power of
Suppliers Buyers
Threat of
Substitute
Products
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9. Threat of Substitute Products
Keys to evaluate substitute products:
Products Products with improving
with similar price/performance tradeoffs
function relative to present industry
limit the products
prices firms
can charge Example:
Electronic security systems in
place of security guards
Fax machines in place of
overnight mail delivery
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10. Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining Rivalry Among Bargaining
Power of Competing Firms Power of
Suppliers in Industry Buyers
Threat of
Substitute
Products
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11. Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:
Jockeying for strategic position
Using price competition
Staging advertising battles
Increasing consumer warranties or service
Making new product introductions
Occurs when a firm is pressured or sees an opportunity
Price competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but
may be costly to smaller competitors
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12. Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when:
Numerous or equally balanced competitors
Slow growth industry
High fixed costs
High storage costs
Lack of differentiation or switching costs
Capacity added in large increments
Diverse competitors
High strategic stakes
High exit barriers
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13. The Five Forces are Unique to
Your Industry
• Five-Forces Analysis is a framework for
analyzing a particular industry.
– Yet, the five forces affect all the other
businesses in that industry.
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14. Competitor Analysis
The follow-up to Industry Analysis is
effective analysis of a firm’s Competitors
Industry
Environment
Competitive
Environment
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15. Competitor Analysis
Assumptions
What assumptions do our
competitors hold about the future Response
of industry and themselves?
What will our
Current Strategy competitors do in the
Does our current strategy support future?
changes in the competitive Where do we have a
environment? competitive
Future Objectives advantage?
How do our goals compare to our How will this change
competitors’ goals? our relationship with
our competition?
Capabilities
How do our capabilities compare
to our competitors?
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16. Competitor Analysis
Future Objectives What Drives the
How do our goals competitor?
compare to our
Where will emphasis
competitors’ goals? be
placed in the future?
What is the attitude
toward risk?
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17. Competitor Analysis
Future Objectives What is the competitor doing?
How do our goals What can the competitor do?
compare to our
Where Current be
competitors’ goals?Strategy
will emphasis
placed in the future? currently
How are we
What is the attitude
competing?
toward risk?
Does this strategy
support changes in the
competitive structure?
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18. Competitor Analysis
Future Objectives What does the competitor believe
How do our goals about itself and the industry?
compare to our
Where Current be
competitors’ goals?Strategy
will emphasis
placed in the future?
How are we currently
What is the attitude
competing?
toward risk? Assumptions
Does this strategy
Do we assume the future
support changes in the
will be volatile?
competition structure?
What assumptions do our
competitors hold about the
industry and themselves?
Are we assuming stable
competitive conditions?
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19. Competitor Analysis
Future Objectives What are the competitor’s
How do our goals capabilities?
compare to our
Where Current be
competitors’ goals?Strategy
will emphasis
placed in the future?
How are we currently
What is the attitude
competing?
toward risk? Assumptions
Does this strategy
Do we assume the future
supportwill be volatile?
changes in the
competition structure?
What assumptions do our
Capabilities
competitors hold about the
industry and themselves?
What are my competitors’
Are we operating under
strengths and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors? Ch2-

20. Competitor Analysis
Future Objectives Response
How do our goals What will our competitors
compare to our do in the future?
Where Current be
competitors’ goals?Strategy
will emphasis Where do we have a
placed in the future? competitive advantage?
How are we currently
What is the attitude
competing? How will this change our
toward risk? Assumptions relationship with our
Does this strategy
Do we assume the future competition?
supportwill be volatile?
changes in the
competition structure?
What assumptions do our
Capabilities
competitors hold about the
industry and themselves?
What are my competitors’
Are we operating under
strengths and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors? Ch2-