PORTERS FIVE FORCES MODEL

WHAT IS THE MODEL ABOUT

This tool was created by Harvard Business School professor, Michael Porter.
To analyze the attractiveness and likelyprofitability of an industry/ company. By studying the structure of the model and dynamics between these forces, a company can discover opportunities for improving upon your strategies.

SIGNIFICANCE OF THE MODEL/ WHEN DO YOU USE THE MODEL

Making a qualitative evaluation of a firm's strategic position. For most consultants, the framework is only a starting point or 'check-list' they might use. The tool is used to identify whether new products, services or businesses have the potential to be profitable Analyze Competitors position For Creating new strategies ,plans and investment decision The Model also supplements SWOT analysis

THREAT OF SUBSTITUTES

BARGAINING POWER OF THE SUPPLIERS

COMPETITOR S RIVALRY

BARGAINING POWER OF THE BUYERS

BARRIERS TO ENTRY

COMPETITORS /INDUSTRy RIVALRy:

The rivalry amongst existing firms analysis will help you to understand the risk that your competitors may compete for market position and if their competitive tactics are likely to be effective. You will find that your competitors may compete for market position using tactics such as; price competition, advertising, increased customer service, or through offering longer warrantee periods

Analyzing Industry Rivalry

To analyze industry rivalry in your industry, you will need to consider the following factors :

Analysis criteria

Description

Industy growth rate

Refers to overall growth rate of your industry.

High fixed cost

Refers to the proportion of the total industry costs that are fixed and variable.

Product differences

Refers to your ability to differentiate your product based on tangible product differences.

Analysis criteria

Description

Switching Costs

Refers to the cost incurred by customers of your industry to switch their source of supply

Informational Complexity

Refers to the how easy or hard it is to understanding your products.

Exit Barriers

Refers to the ease with which your competitors can exit your industry.

BARGAINING POWER OF THE BUyERS: Bargaining power of the buyers is the ability of the buyers to put the firm under pressure to reduce the prices. It is also called as the Market of Output

To analyze the Bargaining Power of your Customers you will need to review your industry by considering the following generic criteria :

Analysis criteria

Description

The Differentiation of Outputs

if the products or services in your industry are similar or are you able to easily differentiate your products and services from those of your competitors?

Presence of Substitutes

A substitute is a different product or service that can be used instead of your industries products or services. Substitutes are typically products/services that are not in your industry.

Importance of volume to buyers

Buyers who buy only a few of your products each year are less likely to shop around for price on those items.

Analysis criteria

Description

Cost relative to total buyer purchases

Buyers tend to prioritize their negotiation efforts in the areas where they spend the most money. If your product or service is a large expense for your customer, then you are more likely to be the focus of their negotiations.

Buyer information about supplier products

This tends to relate to technical products, where the technology in the product is different to the technology of the industry. How easy is it for your customers to understand your product? or your competitors products?

Buyer profitability

Buyer profitability are your customers profitable and likely to remain profitable?

BARGAINING POWER OF THE SUPPLIERS

Bargaining power of the suppliers is the ability of suppliers to increase the price of the inputs and hence it is also called as the Market of Inputs It is found that as the bargaining power of suppliers increases the industry profitability tends to decrease. To analyze the bargaining power of suppliers to ones industry, one will need to consider the following factors :

Analysis criteria

Description

Differentiation of Inputs

Refers to valued, unique and tangible product differences that exist only in your suppliers products.

Switching Costs

Refers to any cost incurred by you to switch to another or a new supplier

Supplier concentration relative to Industry concentration

Refers to the ratio of suppliers to buyers in your industry

Analysis criteria

Description Refers to the suppliers capacity and the volume that you purchase.

Importance of volume to the supplier

Cost relative to the total purchases of Refers to the value to be derived from entering into price negotiations the industry

Impact of inputs on cost or differentiation

Refers to the role your suppliers product plays in differentiating your product or service.

Threat of substitutes
An analysis of the threat of substitute products will identify the likelihood that customers to your industry will switch to purchasing an alternative product from outside your industry.

To analyze the threat of Substitute Products, one needs to consider the following factors :

Analysis criteria

Description

The relative price performance of substitutes

Refers to the cost effectiveness of the substitute products, (Total supply chain costs)

Switching costs

Refers to any cost incurred by your customers to switch to an alternative product

Buyer propensity to substitute

Refers to your customers loyalty to your product or service

BARRIERS TO ENTRY:
An analysis of the threat of new entrants will discover how high the entry barriers are in your industry. An industry with high barriers to entry will have less risk from new competitors than an industry with low barriers to entry. An analysis of the threat of new entrants seeks to identify the barriers to entry or the things about the industry that will make it harder for a new entrant to shift into the industry. To analyses the threat of new entrants to ones industry, one needs to consider the following factors :

Analysis criteria

Description

Economies of scale

Refers to the total size of an industry and the level of concentration within that industry

Government policy

Refers to a government regulation or policy which prevents or prohibits others from entering your industry

Expected retaliation

Refers to the response existing competitors may take to the emergence of a new competitor.

Analysis criteria

Description

Stage in industry life cycle

If an industry is new or emerging you will expect to see an increase in the number of competitors in that industry, however if an industry is mature or in decline you are less likely to see new entrants.

Absolute cost advantage

Refers to the cost of producing your product or service

Capital requirements

Refers to the cost of producing your product or service

Thank you