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!UDIENCE "USINESS MANAGERS SEEKING TO ASSESS
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#ONTENT 0RESENTS FIVE FORCES THAT INFLUENCE THE
4HE ECONOMIC STRUCTURE OF AN INDUSTRY IS NOT AN ACCIDENT
PROFITABILITY OF AN INDUSTRY
)TS COMPLEXITIES ARE THE RESULT OF LONG
TERM SOCIAL TRENDS AND
ECONOMIC FORCES "UT ITS EFFECTS ON YOU AS A BUSINESS MANAGER /UTCOME 2EADER SHOULD UNDERSTAND THE FORCES
AND BE ABLE TO COUNTER THEM WITH APPROPRIATE
ARE IMMEDIATE BECAUSE IT DETERMINES THE COMPETITIVE RULES
TACTICS
AND STRATEGIES YOU ARE LIKELY TO USE ,EARNING ABOUT THAT
STRUCTURE WILL PROVIDE ESSENTIAL INSIGHT FOR YOUR BUSINESS
STRATEGY
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-ICHAEL 0ORTER HAS IDENTIFIED FIVE FORCES THAT ARE WIDELY USED TO 4HIS PUBLICATION DESCRIBES FIVE FORCES THAT INFLUENCE AN
ASSESS THE STRUCTURE OF ANY INDUSTRY 0ORTERS FIVE FORCES ARE THE INDUSTRY 4HE PUBLICATION INCLUDES A SET OF APPLICATION
s "ARGAINING POWER OF SUPPLIERS QUESTIONS THAT WILL HELP YOU EVALUATE THE STRUCTURE OF THE
INDUSTRY YOU ARE IN OR ARE CONSIDERING ENTERING 4HE MORE YOU
s "ARGAINING POWER OF BUYERS
UNDERSTAND ABOUT THE STRENGTH OF EACH FORCE THE BETTER ABLE
s 4HREAT OF NEW ENTRANTS YOU WILL BE TO RESPOND
s 4HREAT OF SUBSTITUTES AND 4HE FORCES AFFECTING PROFITABILITY ARE OFTEN BEYOND YOUR
CONTROL SO YOU MUST CHOOSE TACTICS TO RESPOND TO THE FORCES
s 2IVALRY AMONG COMPETITORS
RATHER THAN TRY TO CHANGE THE BUSINESS ENVIRONMENT 4HIS
4OGETHER THE STRENGTH OF THE FIVE FORCES DETERMINES THE PROFIT PUBLICATION OFFERS INSIGHT ON SPECIFIC TACTICS YOU NEED FOR
POTENTIAL IN AN INDUSTRY BY INFLUENCING THE PRICES COSTS AND SUCCESS WHEN FACING COMPETITIVE SITUATIONS 7HILE YOU MAY
REQUIRED INVESTMENTS OF BUSINESSESTHE ELEMENTS OF RETURN ASSESS ANY ONE FORCE INDIVIDUALLY YOU WILL GAIN THE MOST VALUE
ON INVESTMENT 3TRONGER FORCES ARE ASSOCIATED WITH A MORE BY ASSESSING ALL FIVE OF THE FORCES
CHALLENGING BUSINESS ENVIRONMENT 4O IDENTIFY THE IMPORTANT
7ITH EACH FORCE A h0ERSPECTIVEv FEATURE ILLUSTRATES THE FORCE
STRUCTURAL FEATURES OF YOUR INDUSTRY VIA THE FIVE FORCES YOU
FOR AN )NDIANA WINE ENTREPRENEUR BY EVALUATING THAT MARKET
CONDUCT AN INDUSTRY ANALYSIS THAT ANSWERS THE QUESTION
PLACE 4O AVOID REPETITION WE USE THE WORD hPRODUCTv TO MEAN
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BUYERS THEY WILL HAVE SIGNIFICANT LEVERAGE TO NEGOTIATE LOWER THE PRODUCT AND BUYERS ARE FEW AND LARGE &OR
PRICES AND OTHER FAVORABLE TERMS BECAUSE THE THREAT OF LOSING EXAMPLE YOU MAY HAVE LITTLE NEGOTIATING POWER IF YOU
AN IMPORTANT BUYER PUTS YOU IN A WEAK POSITION "UYERS ALSO AND SEVERAL COMPETING COMPANIES ARE TRYING TO SELL
HAVE POWER IF THEY CAN PLAY SUPPLIERS AGAINST EACH OTHER )N SIMILAR PRODUCTS TO ONE LARGE BUYER
THE AUTOMOTIVE SUPPLY INDUSTRY THE LARGE CAR MANUFACTURERS
HAVE SIGNIFICANT POWER 4HERE ARE ONLY A FEW LARGE BUYERS AND s 4HE PRODUCTS REPRESENT A RELATIVELY LARGE EXPENSE FOR
THEY BUY IN LARGE QUANTITIES "UT WHEN THERE ARE MANY YOUR CUSTOMERS #USTOMERS MAY NOT PRICE SHOP FOR A
SMALLER BUYERS YOU WILL HAVE GREATER CONTROL BECAUSE EACH QUART OF OIL BUT THEY WILL PRICE SHOP IF PURCHASING A
BUYER IS A SMALL PORTION OF YOUR SALES NEW VEHICLE
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NEGOTIATION IF BUYERS KNOW MARKET DEMAND PRICES SWITCH TO 'ATEWAY OR $ELL BUT IT MAY BE INCONVENIENT
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THEMSELVES !NHEUSER
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METAL CAN MANUFACTURING TO FILL THE BALANCE OF THEIR FEATURES OR BRANDING )N ADDITION IF YOU CAN SELECT THE
CONTAINER NEEDS CUSTOMERS WHO HAVE LITTLE KNOWLEDGE OF THE MARKET AND HAVE
LESS POWER YOU CAN ENHANCE YOUR PROFITABILITY
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Ài>ÌÊvÊ iÜÊ
ÌÀ>ÌÃ /VERCOMING BARRIERS TO ENTRY MAY INVOLVE EXPENDING SIGNIFI
CANT RESOURCES OVER AN EXTENDED PERIOD OF TIME )NDUSTRIES
>em;Wio?i?j\eh8ki_d[ii[ije BASED ON PATENTABLE TECHNOLOGY MAY REQUIRE AN ESPECIALLY
;dj[hOekhCWha[j5 LONG
TERM COMMITMENT WITH YEARS OF RESEARCH AND TESTING
BEFORE PRODUCTS CAN BE INTRODUCED AND COMPETE
9OU MAY HAVE THE MARKET CORNERED WITH YOUR PRODUCT BUT
YOUR SUCCESS MAY INSPIRE OTHERS TO ENTER THE BUSINESS AND <WYjehi7\\[Yj_d]j^[J^h[Wje\
CHALLENGE YOUR POSITION 4HE THREAT OF NEW ENTRANTS IS THE
POSSIBILITY THAT NEW FIRMS WILL ENTER THE INDUSTRY .EW ENTRANTS D[m;djhWdji
BRING A DESIRE TO GAIN MARKET SHARE AND OFTEN HAVE SIGNIFICANT 4HE THREAT OF NEW ENTRANTS IS GREATEST WHEN
RESOURCES 4HEIR PRESENCE MAY FORCE PRICES DOWN AND PUT
s 0ROCESSES ARE NOT PROTECTED BY REGULATIONS OR PATENTS
PRESSURE ON PROFITS
)N CONTRAST WHEN LICENSES AND PERMITS ARE REQUIRED TO
!NALYZING THE THREAT OF NEW ENTRANTS INVOLVES EXAMINING THE DO BUSINESS SUCH AS WITH THE LIQUOR INDUSTRY EXISTING
BARRIERS TO ENTRY AND THE EXPECTED REACTIONS OF EXISTING FIRMS FIRMS ENJOY SOME PROTECTION FROM NEW ENTRANTS
TO A NEW COMPETITOR "ARRIERS TO ENTRY ARE THE COSTS ANDOR
s #USTOMERS HAVE LITTLE BRAND LOYALTY 7ITHOUT STRONG
LEGAL REQUIREMENTS NEEDED TO ENTER A MARKET 4HESE BARRIERS
BRAND LOYALTY A POTENTIAL COMPETITOR HAS TO SPEND
PROTECT THE COMPANIES ALREADY IN BUSINESS BY BEING A HURDLE
LITTLE TO OVERCOME THE ADVERTISING AND SERVICE
TO THOSE TRYING TO ENTER THE MARKET )N ADDITION TO UP
FRONT
PROGRAMS OF EXISTING FIRMS AND IS MORE LIKELY TO ENTER
BARRIERS A NEW COMPETITOR MAY INSPIRE ESTABLISHED COMPANIES
THE INDUSTRY
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FORMING PARTNERSHIPS 4HE CHANCE OF REACTION IS HIGH IN s 3TART
UP COSTS ARE LOW FOR NEW BUSINESSES ENTERING THE
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s 4HE PRODUCTS PROVIDED ARE NOT UNIQUE 7HEN THE
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AND CAN CHANGE OVER TIME -OST BARRIERS STEM FROM IRREVERS
ENTER AN INDUSTRY BECAUSE THEY KNOW THEY CAN EASILY
IBLE RESOURCE COMMITMENTS YOU MUST MAKE IN ORDER TO ENTER LIQUIDATE THEIR INVENTORY AND ASSETS IF THE VENTURE FAILS
A MARKET &OR EXAMPLE IF THE EXISTING BUSINESSES HAVE WELL
s 3WITCHING COSTS ARE LOW )N SITUATIONS WHERE CUSTOMERS
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DO NOT FACE SIGNIFICANT ONE
TIME COSTS FROM SWITCHING
AS A POTENTIAL MARKET ENTRANT YOU WILL NEED TO UNDERTAKE AN
SUPPLIERS IT IS MORE ATTRACTIVE FOR NEW FIRMS TO ENTER
EXPENSIVE MARKETING CAMPAIGN TO INTRODUCE YOUR PRODUCTS
THE INDUSTRY AND LURE THE CUSTOMERS AWAY FROM THEIR
"ARRIERS TO ENTRY ARE USUALLY HIGHER FOR COMPANIES INVOLVED
PREVIOUS SUPPLIERS
IN MANUFACTURING THAN FOR COMPANIES THAT PROVIDE A SERVICE
BECAUSE THERE IS OFTEN A SIGNIFICANT EXPENSE IN SETTING UP A s 4HE PRODUCTION PROCESS IS EASILY LEARNED *UST AS
PRODUCTION FACILITY COMPETITORS MAY BE SCARED AWAY WHEN THE LEARNING
CURVE IS STEEP COMPETITORS WILL BE ATTRACTED TO AN
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INDUSTRY WHERE THE PRODUCTION PROCESS IS EASILY
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FIRM PRODUCES
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GREATER PROFITS IF THERE ARE CLOSE SUBSTITUTES AND SWITCHING COSTS
ENTIATED CUSTOMERS CAN EASILY SWITCH AWAY FROM YOUR PRODUCT ARE LOW "UT IN SOME CASES CUSTOMERS MAY BE RELUCTANT TO
TO A COMPETITORS PRODUCT WITH FEW CONSEQUENCES )N CONTRAST SWITCH TO ANOTHER PRODUCT EVEN IF IT OFFERS AN ADVANTAGE
THERE MAY BE A DISTINCT PENALTY FOR SWITCHING IF YOUR PRODUCT IS #USTOMERS MAY CONSIDER IT INCONVENIENT OR EVEN RISKY TO CHANGE
UNIQUE OR ESSENTIAL FOR YOUR CUSTOMERS BUSINESS 3UBSTITUTE IF THEY ARE ACCUSTOMED TO USING A CERTAIN PRODUCT IN A CERTAIN
PRODUCTS ARE THOSE THAT CAN FULFILL A SIMILAR NEED TO THE ONE WAY OR THEY ARE USED TO THE WAY CERTAIN SERVICES ARE DELIVERED
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"E AWARE THAT SUBSTITUTE PRODUCTS CAN COME IN MANY SHAPES BUT A BOTTLER MAY HAVE TO RECONFIGURE ITS EQUIPMENT
AND SIZES AND DO NOT ALWAYS COME FROM TRADITIONAL COMPETI
AND RETRAIN ITS WORKERS IF IT SWITCHES FROM ALUMINUM
TORS 0ORK AND CHICKEN CAN SUBSTITUTE IN CONSUMER DIETS FOR CANS TO PLASTIC BOTTLES
BEEF OR LAMB !LUMINUM BEVERAGE CANS BATTLE IN THE MARKET
AGAINST GLASS BOTTLES AND PLASTIC CONTAINERS #OTTON COMPETES s #USTOMERS HAVE LITTLE LOYALTY 7HEN PRICE IS THE
WITH POLYESTER FROM THE PETROLEUM INDUSTRY "ARNES AND .OBLE CUSTOMERS PRIMARY MOTIVATOR THE THREAT OF SUBSTITUTES
RETAIL BOOKSTORES COMPETE WITH )NTERNET RETAILER !MAZON IS GREATER
0OSTAL SERVICES COMPETE WITH E
MAIL AND FAX MACHINES
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7HEN DEVELOPING A BUSINESS PLAN IT IS CRITICAL TO ASSESS THE
9OU CAN REDUCE THE THREAT OF SUBSTITUTES BY USING TACTICS SUCH
OTHER OPTIONS YOUR CUSTOMERS HAVE TO SATISFY THEIR NEEDS 4O DO
AS STAYING CLOSELY IN TUNE WITH CUSTOMER PREFERENCES AND
THIS LOOK FOR PRODUCTS THAT SERVE THE SAME FUNCTION AS YOURS !
DIFFERENTIATING YOUR PRODUCT BY BRANDING )N SOME CASES THE
THREAT EXISTS IF THERE ARE ALTERNATIVE PRODUCTS WITH LOWER PRICES
ADVERTISING REQUIRED TO DIFFERENTIATE IS MORE THAN ONE FIRM CAN
OR BETTER PERFORMANCE OR BOTH
BEAR )N THAT CASE COLLECTIVE ADVERTISING FOR AN INDUSTRY MAY
BE MORE EFFECTIVE
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OCCURS BECAUSE WHEAT AND CORN ARE SUBSTITUTES IN ANIMAL FEED
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RESPOND WITH h9ESv OR h.Ov IN THE SPACE PROVIDED h9ESv INDICATES A FAVORABLE COMPETITIVE ENVIRONMENT FOR YOUR BUSINESS h.Ov INDICATES
A NEGATIVE SITUATION 5SE THE INSIGHT YOU GAIN TO DEVELOP EFFECTIVE TACTICS FOR COUNTERING OR TAKING ADVANTAGE OF THE SITUATION
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5SING A PENCIL AND SHEET OF PAPER EXAMINE IN GREATER DETAIL HOW THE THREAT OF SUBSTITUTES WILL AFFECT YOUR BUSINESS
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ABOUT OFFERING CUSTOMERS THE MOST ATTRACTIVE COMBINATION OF
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YET WITH SMALL BUSINESSES EVEN A LITTLE COMPETITION GOES A LONG MORE RIVALS CAN ACTUALLY BE A POSITIVEFOR INSTANCE IN A
WAY "ECAUSE COMPANIES IN AN INDUSTRY ARE MUTUALLY DEPEN
SHOPPING AREA WHERE ATTRACTING CUSTOMERS MAY HINGE ON HAVING
DENT ACTIONS BY ONE COMPANY USUALLY INVITE COMPETITIVE ENOUGH STORES AND ATTRACTIONS TO MAKE IT A WORTHWHILE STOP
RETALIATION !N ANALYSIS OF RIVALRY LOOKS AT THE EXTENT TO WHICH
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THE COMPETITIVE FORCE IS WEAK COMPANIES MAY BE ABLE TO RAISE EXPERIENCE INTENSE RIVALRY WHEN THESE FIRMS ARE
PRICES PROVIDE LESS PRODUCT FOR THE PRICE AND EARN MORE BATTLING TO ACHIEVE MARKET LEADER STATUS )N OTHER
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SITUATIONS THE BUSINESSES IN THE INDUSTRY WILL BE VYING
s 4HERE ARE HIGH FIXED COSTS OF PRODUCTION 7HEN A LARGE
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4HIS MAY TEMPT COMPANIES TO DRASTICALLY CUT PRICES INVESTED HEAVILY IN THEIR FACILITIES WILL TRY HARD TO PAY
WHEN THERE IS EXCESS CAPACITY IN THE INDUSTRY IN ORDER FOR THEM AND MAY RESORT TO EXTREME METHODS OF
TO SELL GREATER VOLUMES OF PRODUCT COMPETITION
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HIGH TACTICS 4O MINIMIZE PRICE COMPETITION DISTINGUISH YOUR
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s 0RODUCTS ARE NOT UNIQUE OR HOMOGENOUS FEATURES /THER TACTICS INCLUDE FOCUSING ON A UNIQUE
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VALUE FROM THE PRODUCTS OF DIFFERENT FIRMS "ECAUSE CUSTOMER LOYALTY
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IS EASY TO GAIN ENTRY BUT VERY DIFFICULT TO GET OUT .OT SURPRIS
TOOL TO EXAMINE THE PROFIT POTENTIAL IN A PARTICULAR INDUSTRY
INGLY THESE INDUSTRIES TEND TO BE MEDIOCRE INVESTMENTS 'AINING AN UNDERSTANDING OF THE WAY IN WHICH EACH OF THE
FIVE FORCES INFLUENCES YOUR PROFITABILITY WILL PROVIDE YOU WITH
! FULL
FLEDGED INDUSTRY ANALYSIS WOULD REQUIRE EXTENSIVE
TACTICS FOR COUNTERING THE STRENGTH OF THE FORCES
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It is the policy of the Purdue University Cooperative Extension Service, David C. Petritz, Director, that all persons shall have equal opportunity and access
to the programs and facilities without regard to race, color, sex, religion, national origin, age, marital status, parental status, sexual orientation,
or disability. Purdue University is an Affirmative Action institution. This material may be available in alternative formats.
1-888-EXT-INFO
http://www.ces.purdue.edu/new
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