Michael Porter's 5 forces model
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Michael Porter developed the Five Forces model for analyzing industry competition and profitability. The five competitive forces are: 1) rivalry among existing competitors, 2) threat of new entry, 3) threat of substitute products, 4) bargaining power of suppliers, and 5) bargaining power of buyers. The model helps evaluate an industry's attractiveness by examining the strength of each force and impact on profitability. Determinants that influence the competitive forces are also identified such as barriers to entry, supplier/buyer concentration, and product differentiation.
Michael Porter's 5 forces model
- 1. Michael Porter’s 5 Forces Model STRATEGIC MANAGEMENT AND POLICY ANALYSIS Arch. Maribel C. Tubera – DBA Student
- 2. Michael E. Porter Harcard professor who propelled the concept of industry environment into the foreground of strategic thought and business planning.
- 3. The 5 forces of competion model It expands the area for competitive analysis; It recognizes that suppliers can become firms’ competitors (by integrating forward), as can buyers (by integrating backward).
- 4. The 5 forces of competition model 1. Rivalry among competing firms 2. Potential entry of new competitors 3. Potential development of substitute products 4. Bargaining power of suppliers 5. Bargaining power of consumers
- 5. Forces driving industry competition Industry Competitiors Intensity of rivalry Buyers New Entrants Suppliers Substitues Treat of new entrants Bargaining power of buyers Treat of substitutes Bargaining power of suppliers
- 6. Determinants of Entry Economies of scale Propriety product differences Brand identity Switching costs Capital requirements Access to distribution Absolute cost advantages Government policy Expected retaliation Propriety curve – Access to necessary inputs – Propriety low-cost product design
- 7. Determinants of rivalry Industry growth Fixed (or storage) costs/valur added Intermitent overcapacity Product differences Brand identity Switching costs Concentration and balance Informational complexity Diversity of competitors Corporate stakes Exit barriers
- 8. Determinants of supplier power Differentiation of inputs Switching costs of suppliers and firms in the industry Presence of substitute inputs Supplier concentration Importance of volume to supplier Cost relative to total purchases in the industry Impact of inputs on cost or differentiation Treat of forward integration relative to treat of backward integration by firms in the industry
- 9. Determinants of buyer power Bargaining leverage Buyer concentration versus firm concentration Buyer volume Buyer switching costs relative to firm switching costs Buyer information Ability to backward integrate Substitute products Pull-through Price sensitivity Price/total puchases Product differences Brand identity Impact on quality/performance Buyer profits Decision makers’ incentives
- 10. Determinants of substituion threat Relative price performance if substitutes Switching costs Buyer propensity to substitute
- 11. 1. Intensity of rivalry among competitors It is the most powerful of the five competitive forces; Competitors rivalry intensifies when a firm is challenged by a competitors’ actions or when a company recognizes an opportunity to improve its market position.
- 12. Common mistakes in identifying competitors 1. Overemphasizing current and known competitors while giving inadequate attention to potential entrants; 2. Overemphasizing large competitors while ignoring small competitors; 3. Overlooking potential international competitors; 4. Assuming that competitors will continue to behave in the same way they have behaved in the past; 5. Misreading signals that may indicate a shift in the focus of competitors or a refinement of their present strategies or tactics; 6. Overemphasizing competitors’ financial resources, market position, and strategies while ignoring their intangible assets, such as a top management team; 7. Assuming that all of the firms in the industry are subject to the same constraints or are open to the same opportunities; 8. Believing that the purpose of strategy is to outsmart the competition, rather than to satisfy customer needs and expectations.
- 13. 2. Threat of new entrants It is important because they can threaten the market share of existing competitors; When the threat of new firms entering the market is strong, incumbent firms generally fortify their positions and take actions to deter new entrants.
- 14. Barriers to entry 1. Economies of scale- it enhances firm’s flexibility. 2. Product differentiation – overtime, consumers may believe that firm’s product is unique. 3. Capital requirements – it requires resources to invest. 4. Switching cost – it can vary as a function of time. 5. Access to distribution channels 6. Cost disadvantages indepndent of scale 7. Government policy 8. Expected retaliation
- 15. 3. Potential development of substitute products These are goods or services from outside a given industry that perform similar or the same functions as a product that the industry produces.
- 16. 4. Bargaining power of suppliers It affects the intensity of competition in an industry, especially when there is a large number of suppliers, when there are only a few good substitute raw materials or when the cost of switching raw materials is especially costly.
- 17. Supplier group is powerful when: 1. It is dominated by a few large companies and is more concentrated than the industry to which it sells; 2. Satisfactory substitute products are not available to industry firms; 3. Industry firms are not a significant customer for the supplier group; 4. Suppliers’ goods are critical to buyers’ marketplace success; 5. The effectiveness of suppliers’ products has created high switching costs for industry firms; 6. It poses a credible threat to integrate forward into the buyers’ industry. Credibility is enhanced when suppliers have substantial resources and provide a highly differentiated product.
- 18. 5. Bargaining power of consumers Customers are powerful when: 1. They purchase a large portion of an industry’s total output; 2. The sales or product being purchased account for a significant portion of the sellers annual revenues; 3. They could switch to another product at little cost; 4. The industry’s products are undifferentiated or standardized, and the buyers pose a credible threat if they were to integrate backward into the sellers’ industry.
- 19. 3 steps for using Porter’s 5-forces model 1. Identify key aspects or elements of each competitive force that impact the firm; 2. Evaluate how strong and important. Each element is for the firm; 3. Decide whether the collective strength of the elements is woth the firm entering or staying in the industry.
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