Porters Five Forces Model

Posted on May 15 2009

Porters Five Forces Model is one used for analysis of an industry or pure competition within a market. It is likely the best model to be used in decisions of entry or change within a market, and should always be considered during the business planning stage in a company life cycle.

Porters Five Forces Model states that risk-adjusted rates of return should be constant across firms and industries, however, is disputed in various studies. Different industries can experience different levels of profitability.

The Porters Five Forces model propose that an industry is influenced by five forces. An executive can use the model to understand the industry competitive landscape, to determine how and where the firm should operate. The model is also used to analyze the attractiveness of an industry structure.

Porters Five Forces Model is also known as Porter’s Competitive Forces model, probably one of the most often used business strategy tools. It has proven its usefulness on numerous occasions. Porter’s model is particularly strong in thinking in a competitive mindset – from external forces to inside the company.

The Porters Five Forces Model Competitive Forces analysis is made by the identification of 5 fundamental competitive forces: 1. Entry of competitors

–What are the Absolute cost advantages?

–How will competitors gain access to distribution?

–What access to inputs will new competitors get?

–Which barriers do exist?

–What capital requirements does a new competitor need?

–How easy or difficult is it for new entrants to start competing?

–What economies of scale does a competitor need?

–What is the expected retaliation by existing competitors?

–Does a competitor need to establish brand identity? How is theirs compared to ours? –Are there government policies that dictate the entry?

–Is there a proprietary learning curve?

–Which are proprietary products?

2. Threat of substitutes

–How easy can a product or service be substituted?

–Can products be made cheaper ?

–What are the switching costs?

–Is there buyer inclination to substitute?

–What is the price-performance comparisons of substitutes?

–What are the trade-offs of substitutes?

3. Bargaining power of buyers

–How strong is the position of buyers?

–Can they work together in ordering large volumes?

–What bargaining leverage exists?

–What kind of buyer volume exists?

–What buyer information is available?

–What brand identity exists? Does it matter?

–What price sensitivity exists in the market?

–Is there threat of backward integration?

–Will there be product differentiation? Does there need to be?

–What is the buyer concentration vs. industry?

–What substitutes are available?

–What incentives exists for buyers?

4. Bargaining power of suppliers

–How strong is the position of sellers?

–Do many potential suppliers exist or only few potential suppliers?

–Is there a monopoly of suppliers?

–What is the concentration of suppliers?

–What is the importance of volume to suppliers?

–What is the differentiation of inputs?

–What is the impact of inputs on costs or differentiation?

–Is there presence of substitute inputs?

–What is the threat of forward integration?

–What are costs relative to purchases in the industry?

5. Rivalry among the existing players

–Does a strong competition between the existing players exist?

–What kind of diversity of rivals exists?

–Is one player very dominant or are all equal in strength and size?

–What barriers to exit exists?

–What are the switching costs?

–What is industry concentration?

–What is the fixed costs vs. value added ratio?

–What kind of industry growth exists?

–Is there ever any intermittent overcapacity?

–What product differences currently exist?

–What brand identity exists?

–What Corporate stakes exists?

While the Porters Five Forces model in regards to decision making, is to collect, analyze and present data for the decision maker, Porter identifies three generic strategies to address industry rivalry. Strategies can be formed on three levels – corporate, business unit and functional or department level. The Strategies are cost leadership, differentiation and competitive advantage. The best decision will position the firm to leverage strengths and defend against adverse effects of the five forces.

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