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Michael Porter’s
Five Forces
Model
Michael Porter …
“An industry’s profit potential
is largely determined by the
intensity of competitive
rivalry within that industry.”
Porter’s Five Forces
Portfolio Analysis …
… Strategy at the time (1970s)
was focused on two dimensions
of the portfolio grids …
… Industry Attractiveness
… Competitive Position
Business Strength
Matrix
Where was
Michael Porter
coming from?
School of Economics …

… at Harvard …
… Exposed Porter to the
Industrial Organization (I0)
sub-field of Economics.
Structural reasons why
…
… some industries were profitable
* Firm concentration
* Established cost advantages
* Product differentiation
* Economies of scale
Structural reasons …
… all represented barriers to
entry in certain industries,
thus allowing those
industries to be more
profitable than others.
But Economists …
… generally concerned themselves with the minimization
rather than maximization of
what they viewed as excess
profits (i.e., Public Policy).
Business policy objective
… of profit maximization
Porter developed his elaborate
framework for the structural
analysis of industry attractiveness within the framework of
Business Policy.
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.
Porters Five Forces …
* Threat of Entry
* Bargaining Power of Suppliers
* Bargaining Power of Buyers
* Development of Substitute
Products or Services
* Rivalry among Competitors
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
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.
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.
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
Rivalry among competitors
as

… intensity increases

* 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
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
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.
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.
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 .
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).
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
Industry & Product
Life Cycles
Industry & Product
Life Cycles
Bright Horizons (12 months)

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Porters five forces

  • 2. Michael Porter … “An industry’s profit potential is largely determined by the intensity of competitive rivalry within that industry.”
  • 4. Portfolio Analysis … … Strategy at the time (1970s) was focused on two dimensions of the portfolio grids … … Industry Attractiveness … Competitive Position
  • 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 themselves 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 attractiveness 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 as … intensity increases * 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