is the Five Forces model of Porter? Description
The Five Forces model of Porter is an Outside-in business unit strategy
tool that is used to make an analysis of the attractiveness (value) of an
industry structure. The Competitive Forces analysis is made by the identification
of 5 fundamental competitive forces:
- Entry of competitors. How easy or difficult is it for new entrants
to start competing, which barriers do exist.
- Threat of substitutes. How easy can a product or service be substituted,
especially made cheaper.
- Bargaining power of buyers. How strong is the position of buyers.
Can they work together in ordering large volumes.
- Bargaining power of suppliers. How strong is the position of
sellers. Do many potential suppliers exist or only few potential suppliers,
- Rivalry among the existing players. Does a strong competition
between the existing players exist? Is one player very dominant or are all
equal in strength and size.
Sometimes a sixth competitive force is added:
Porter's Competitive Forces model is 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 Outside-in.
Threat of New Entrants depends on:
- Economies of scale.
- Capital / investment requirements.
- Customer switching costs.
- Access to industry distribution channels.
- Access to technology.
- Brand loyalty. Are customers loyal?
- The likelihood of retaliation from existing industry players.
- Government regulations. Can new entrants get subsidies?
Threat of Substitutes depends on:
- Quality. Is a substitute better?
- Buyers' willingness to substitute.
- The relative price and performance of substitutes.
- The costs of switching to substitutes. Is it easy to change to another
Bargaining Power of Suppliers depends on:
- Concentration of suppliers. Are there many buyers and few dominant suppliers?
Compare: Kraljic Model.
- Branding. Is the brand of the supplier strong?
- Profitability of suppliers. Are suppliers forced to raise prices?
- Suppliers threaten to integrate forward into the industry (for example:
brand manufacturers threatening to set up their own retail outlets).
- Buyers do not threaten to integrate backwards into supply.
- Role of quality and service.
- The industry is not a key customer group to the suppliers.
- Switching costs. Is it easy for suppliers to find new customers?
Bargaining Power of Buyers depends on:
- Concentration of buyers. Are there a few dominant buyers and many sellers
in the industry?
- Differentiation. Are products standardized?
- Profitability of buyers. Are buyers forced to be tough?
- Role of quality and service.
- Threat of backward and forward integration into the industry.
- Switching costs. Is it easy for buyers to switch their supplier?
Intensity of Rivalry depends on:
- The structure of competition. Rivalry will be more intense if there
are lots of small or equally sized competitors; rivalry will be less if
an industry has a clear market leader.
- The structure of industry costs. Industries with high fixed costs encourage
competitors to manufacture at full capacity by cutting prices if needed.
- Degree of product differentiation. Industries where products are commodities
(e.g. steel, coal) typically have greater rivalry.
- Switching costs. Rivalry is reduced when buyers have high switching
- Strategic objectives. If competitors pursue aggressive growth strategies,
rivalry will be more intense. If competitors are merely "milking" profits
in a mature industry, the degree of rivalry is typically low.
- Exit barriers. When barriers to leaving an industry are high, competitors
tend to exhibit greater rivalry.
Strengths of the Five Competitive Forces Model. Benefits
- The model is a strong tool for competitive analysis at industry level.
Compare: PEST Analysis
- It provides useful input for performing a
Limitation of Porter's Five Forces model
- Care should be taken when using this model for the following: do not
underestimate or underemphasize the importance of the (existing) strengths
of the organization (Inside-out strategy). See:
- The model was designed for analyzing individual business strategies.
It does not cope with synergies and interdependencies within the portfolio
of large corporations. See: Parenting
- From a more theoretical perspective, the model does not address the
possibility that an industry could be attractive because certain companies
are in it.
- Some people claim that environments which are characterized by rapid,
systemic and radical change require more flexible, dynamic or emergent approaches
to strategy formulation. See:
- Sometimes it may be possible to create completely new markets instead
of selecting from existing ones. See:
Blue Ocean Strategy
Overview of the Book "Competitive Strategy"
- In Part I, Porter discusses the structural analysis of industries
(with the five forces), the three generic competitive strategies (overall
Cost Leadership, Focus, and Differentiation), offering an excellent framework
for competitor analysis, competitive moves, strategy toward buyers and suppliers,
structural analysis within industries (strategic groups, strategic mapping,
mobility barriers), and industry evolution (life cycle, evolutionary processes).
- In Part II, Porter discusses competitive strategy within various
generic industry environments. Such as: fragmented industries (with
no real market leader), emerging industries, mature industries, declining
industries, and global industries.
- In Part III, Porter discusses strategic decisions which businesses/firms
can take. Such as: vertical integration (forward, backward, partnerships),
capacity expansion, and entry into new industries/businesses.
Book: Michael E.
Porter - Competitive Strategy -
||Who is the Buyer in the Internet Industry?
"Can someone help to identify who plays the buyer role in the Internet industry? Is it the individual person? Or does it mean the buyer who acquires an Internet service? Like in the case of Google acquiring Youtube, is Google then one of the buyers in the Internet industry?
Thanks for your tips..."
||How to Deal with Competitors in Five Forces Analysis?
"Okay I understand the five forces, but when I'm trying to apply the model, where do I place other competitive rivals of the firm?
For example, if I am doing a five force analysis on supermarkets, in the competitive rivalry do I name other supermarkets like Tesco, Sainsbury's and so on or do I input the level of rivalry such as there are a lot of large dominating companies?
I do not understand the application of the model fully if someone can help?"
||The Conclusion based on the Five Forces Model
"Who can tell more about the conclusion based on the 5 forces model after you have analyzed all competitive forces?
How do you conclude whether an industry is attractive or not in terms of low, moderate and high competition of each force?"
||MEDIA as the 7th Force in Porter's Five Forces
"If media is added it would complement the Porter model of forces, as the media today have become an inevitably interwoven phenomenon in our personal and organizational lives. Also it is a primary instrument to catalyze the other forces."
||Porter's Five Forces is Excellent Tool
"Porter's' five force theory is an excellent tool that is applicable to all areas of business along with its complement the PESTLE analysis. It allows the current and potential business owners to critically analyze the potential business domain and strategically formulate a potentially successful plan. It will prove viable and possess the business muscle need to survive in the business arena."
||Basis of Five Forces Strategies
"The five forces theory looks at strategy formulation from the industry(macro) perspective. The theory is hinged on the concept that different competitive activities of players in the industry impact an individual company's performance. However the literature is replete with studies of alternative views of industry rivalry. The resource based view (RBV), blue ocean strategy and others are based on the view that individual performances driven by core capabilities and skills and other assets internal to it can create competitive advantage for the company. By the same token, individual companies using these capabilities can outperform rivals even when the industry generally is lagging. Using the five forces theory is therefore dependent on whether the case actually demands that you use it. In which case you will need to analyse the industry (buyers, suppliers, rival firms and so on) that interface with the firm and are likely to affect its success and ability to compete with rivals."
||Evolution in Our Expectations of Business and Porter's Model
"One item that does not easily float to consciousness is the evolution in our expectations of business and how we define responsible business business behaviour. The model as originally conceived was so focus on what were the most well accepted aspects of competitive life. It failed to take, at least up until that time, the still evolving conceptions of corporate responsibility (social and ecological)."
||Business Networking: Forces are Getting Connected
"I think, there is an interesting phenomena around us due to business networking. Can't we say that the basic model has now evolved into a more integrated one? I believe the 'forces' are now getting connected. For example, threat of new entrant and threat of a substitute consolidate in the case of "Chinese" product entering competition. Similarly other forces are forming permutations. I would like to hear from all on this..."
||Substitution in the Five Forces Model
"I am interested in 'substitutes' such as:
1. New inventions - e.g. Mobile phones as communicators
2. New applications of existing products - e.g. Internet on mobile phones
3. New technologies to gainfully use existing materials more effectively -e.g. Nanotechnology
4. New discoveries about an existing product/material - e.g. Use of aspirin to treat heart ailments
The list goes on. Is the impact of the likes of the above covered in Porter's framework? I think the threat from such forces which makes the product or service obsolescent / redundant is more important today as compared to all other forces put together, because the time frames for new inventions and discoveries to take place has come down. Can we call it an increase in the rate of evolution of the mankind?"
||There are More than Porter's 5 Forces!
"We also have other forces that operate together with Porters model. For example Government, Society and natural phenomena. These other three factors can be a threat or an opportunity to any business venture:
- Government with its legal policies
- Society with its demands and pressures on organizations, and
- Natural disasters.
Take an example of a slaughter house in dry areas where cows are dying out of draught, a textile company in Nakuru where cotton growing in Kenya collapsed because the government allowed the importation of second hand clothe, talk of a mining company that requires the residents to leave their land for another settlement and yet the residents are feel cheated out of the deal. Therefore, in industry competitiveness, government, society and natural phenomena can not be ignored."
||It's a practical tool
"I have experienced the 5 Forces Model of Porter as a good practical business tool. It provides good help to discuss both strategy and operational business issues. It provides i.e. good help to weight initiatives, projects for the next period in respect of the current prosition of a business. It is a good tool to make a company, a unit aware who it's competitors are, where threats are, and which opportunities are at stake. The 5 forces model has proven to be a practical business tool besides an academic tool."
||5 Forces in the public sector
"The profitability (such as more students & diploma's) in the education sector is becoming increasingly a predicament for the public sector. It would be therefore a challenge to interpret and apply the 5 forces model for the public sector."
||5 forces and supplier marketing
"The 5 forces model doesn't take in to account supplier's marketing strategy especially investement in to advertizing and branding which can certainly sway supplier's power away and create a brand new environment. Otherwise it's a good model...."
||Assumptions of the Five Forces model
"The Five Forces model has two basic premises. The first is that the goal of a business is long-term profitability. The second is that the intensity of competition in an industry is neither a matter of coincidence or bad luck. Competition is rooted in an industry's economic structure."
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