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A Framework for

I ndustry Analysis
Five Forces model
- Michael Porter
Parameters of Strategy
The Five Competitive Forces
That Shape Strategy
Michael Porter, Harvard Business Review, 2008
Uses for the Five Forces model
What is the long-term profit potential for
the industry?
Is this an attractive industry in which to
participate at all?
If so, where within the industry are these
forces most favorable to long-term profit?
How will changes in these five forces
create opportunities / threats?
Threat of New Entrants
The perceived likelihood that new players
will enter an industry (successfully or not).
A function of barriers to entry which can be
Advantages of being there already (incumbency)
Economies of scale, network effects
Experience, first mover advantages
Customer loyalty / switching costs
Capital requirements / minimum economic scale
Access to key resources, distribution channels, etc.
Government policy
Implications of
Threat of New Entrants
High threat of new entrants is negative for
long-term industry profitability.

Low threat of new entrants is positive for
long-term industry profitability.
Threat from
Substitute Products
A substitute product is a different
product category which can deliver
the same end benefit to the user as the
industrys product
Extent of substitutes depends on
definition of the industrys product
Threat from substitutes depends on price
/ performance tradeoffs in relation to the
industrys product
Implications of
Threat from Substitutes
Availability and suitability of
substitute products as an alternative
tends to limit industry profitability.
Bargaining Power of Suppliers
The ability (and propensity) of Suppliers to
capture value from the sale of the end
product through their own pricing.
Depends on
Industry switching costs
Supplier differentiation / availability of substitutes
Credible threat of forward integration
Supplier concentration relative to the industry
Suppliers reliance on the industry
Implications of
Bargaining Power of Suppliers
High bargaining power of suppliers is
negative for long-term industry
profitability.

Low bargaining power of suppliers is
positive for long-term industry
profitability.
Bargaining Power of Buyers
Ability (and propensity) of Buyers to
bargain away industry profits by
demanding low prices
Depends on
Buyers switching costs
Buyer concentration relative to the industry
Credible threat of backward integration
Importance of the product to buyers in terms of
cost and / or quality of their own product

Implications of
Bargaining Power of Buyers
High bargaining power of buyers is
negative for long-term industry
profitability.

Low bargaining power of buyers is
positive for long-term industry
profitability.
Industry Rivalry
The intensity and nature of rivalry among
current industry participants
Depends on
Opportunities for distinctive strategies
Customer switching costs
Industry growth rate / capacity relative to demand
Fixed cost structure / perishable product
Barriers to exit
Idiosyncrasies of industry participants
Industry Rivalry
High level of industry rivalry is negative
for long-term industry profitability.

Low level of industry rivalry is positive for
long-term industry profitability.

Uses for the Five Forces model
What is the long-term profit potential for
the industry?
Is this an attractive industry in which to
participate at all?
If so, where within the industry are these
forces most favorable to long-term profit?
How will changes in these five forces
create opportunities / threats?
The Five Competitive Forces
That Shape Strategy
Michael Porter, Harvard Business Review, 2008
Key Concepts
Bargaining power
Barriers to entry / exit
Switching costs
Economies of scale / network effects
Cost structure
Forward / backward integration