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 them-selves
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 attractive-ness within the
framework of Business Policy.
 Michael Porter …
By using a framework rather than a
formal statistical model,
model Porter 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,
concentrated large or
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
… intensity increases as
* 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,
intensifies industry profits
decline,
decline in some 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,”
experience and this
creates a barrier to entry,
entry as new competitors
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,
jump but to which 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)