Porter's five forces model is a framework for industry analysis and business strategy development. It draws attention to five competitive forces that shape every industry and the profit potential of the industry. The five forces are the threat of new entrants, the power of suppliers, the power of buyers, the threat of substitute products or services, and the intensity of competitive rivalry. The model helps identify where power lies in a business situation.

1. Porter’s model of 5 competitive forces is
one of the most often How easy or hard it is for new entrants to
used business Potential New Entrants
start and compete? Any barriers to their
entry?
strategy tools
How strong is the rivalry among existing
players? Does only one player dominate?
Intra- Bargaining
Bargaining Industry Rivalry Power of the
Power of Suppliers Strategic Business Buyers
Unit
How strong is the position of the How strong is the position
suppliers? Are there many? Few? of the buyers? Can we sell
Monopoly? in large volumes? Do we
need to discount heavily?
Source:
Substitute Products
Michael E. Porter “Forces and Services
Governing Competition in How easy or hard it is for
a new product or service to replace what already exists?
Industry (Harvard Business
Review, Mar.-Apr. 1979)

2. Porter’s Five
Competitive Forces
That Shape Strategy
www.youtube.com/watch?v=mYF2_FBCvXw
Porter’s Competitive Forces
http://www.bbc.co.uk/dna/h2g2/alabaster/A583120
Michael Porter on why America needs an economic

4. Generic Strategies and Industry Forces
Generic Strategies
Industry
Force Cost
Differentiation Focus
Leadership
Entry Ability to cut price in
retaliation deters potential
Customer loyalty can
discourage potential
Focusing develops core
competencies that can act
Barriers entrants. entrants. as an entry barrier.
Large buyers have less Large buyers have less
Buyer Ability to offer lower price power to negotiate power to negotiate
Power to powerful buyers. because of few close because of few
alternatives. alternatives.
Suppliers have power
because of low volumes,
Supplier Better able to pass on
Better insulated from but a differentiation-
supplier price increases to
Power powerful suppliers.
customers.
focused firm is better able
to pass on supplier price
increases.
Customer's become
Threat of Can use low price to
defend against
attached to differentiating
Specialized products &
core competency protect
Substitutes attributes, reducing threat
substitutes. against substitutes.
of substitutes.
Rivals cannot meet
Better able to compete on Brand loyalty to keep
Rivalry price. customers from rivals.
differentiation-focused
customer needs.

5. Applying the Porter Competitive Model
to Wal-Mart
 Foreign General Merchandisers
Potential or Discounters
New Entrants  Established Retailer Shifting
Strategy to Discounting or
Megastores
Intra-Industry Rivalry
Bargaining SBU: Wal-Mart
Rivals: Kmart, Target, Bargaining
Power
Toys R Us, Specialty Stores Power of Buyers
of Suppliers
 U.S. Product Manufacturers  Consumers in Small
 Foreign Manufacturers Town U.S.A.
 Local Governments Substitute  Consumers in the
 I/T Product and Service
Products Metropolitans Areas
Suppliers in the U.S.
and Services  Canadian and
Mexican Consumers
 Mail Order  Telemarketing
 Home Shopping Network  Buying Clubs  Other Foreign
 Electronic Shopping  Door-to-door Sales Consumers

7. Porter Competitive Model
Education Industry: U.S. Universities
Potential
 Foreign Universities
 Distance Learning
New Entrants  Motorola University
 Phoenix, DeVry, National
Bargaining
Intra-Industry Rivalry Bargaining
Power
Strategic Business Unit Power of Buyers
of Suppliers
 Faculty and Staff  Students
 Equipment, Service, Substitute  Parents
Suppliers
Products  Business
 Alumni and Services
 Employers
 Foundations, Business  Legislators
 Government  Books and Videotapes
 Computer-Based Training
 Training Companies
 Consulting Firms

8. Porter’s Model and the Role of the Government:
 The government plays an important role in Porter’s diamond model.
Like everybody else, Porter argues that there are some things that
governments do that they shouldn't, and other things that they do not
do but should. He says, "Government’s proper role is as a catalyst and
challenger; it is to encourage - or even push - companies to raise their
aspirations and move to higher levels of competitive performance …"
 Governments can influence all four of Porter’s determinants through a
variety of actions such as
– Subsidies to firms, either directly (money) or indirectly (through
infrastructure).
– Tax codes applicable to corporation, business or property ownership.
– Educational policies that affect the skill level of workers.
– They should focus on specialized factor creation. (How can they do this?)
– They should enforce tough standards. (This prescription may seem
counterintuitive. What is his rationale? Maybe to establish high technical
and product standards including environmental regulations.)
 The problem, of course, is through these actions, it becomes clear which
industries they are choosing to help innovate. What methods do they use to
choose? What happens if they pick the wrong industries?

9. Criticisms
 Although Porter theory is renowned, it has a number of critics.
 Porter developed this paper based on case studies and these
tend to only apply to developed economies.
 Porter argues that only outward-FDI is valuable in creating
competitive advantage, and inbound-FDI does not increase
domestic competition significantly because the domestic firms
lack the capability to defend their own markets and face a
process of market-share erosion and decline. However, there
seems to be little empirical evidence to support that claim.
 The Porter model does not adequately address the role of
MNCs. There seems to be ample evidence that the diamond is
influenced by factors outside the home country.