Porter’s Five Forces
Elements Porter’s Five Forces:
Threat of new entrants: Economies of scale, Product differentiation, Capital requirements, Switching cost, Access to distribution channel, Cost advantage independent of scale.
Bargaining power of suppliers: Concentration, Substitutability, Vertical integration, Strategic importance, Switching cost
Bargaining power of buyers: Concentration and size, Strategic importance, Product standardization, Switching cost, Vertical integration
Threat of product substitutes: Direct and indirect substitution, lifecycle
Forces determining the profitability of an industry
- current market volume, how is demand likely to change?
- areas og strongest growth?
- segments with high profit potential?
- predominant market trends, are these likely to change?
- principle products purchased?
- what is their end use?
- principle products purchased (size, weight, packaging etc.) and specifications?
- price levels and range?
- discounts used, aimed to trading (stock building) or end users?
- terms and conditions of sale, normal practices and regulations?
- principle method of physical distribution?
- trade channels, new trade opportunities?
- decision makers?
- principle methods of communication, sales force, PR, advierticing?
- relevant industry trade associations or government bodies?
- who are the direct, what strengths and weaknesses?
- their standing in the marketplace?
- their historical sales performance, extent of diversification?
- their available resources, where are they likely to focus in future?
- the concentrations of power in the supply chain?
- the history of new entrants or substitutes, are they likely contenders in future?
- level of internationalisation of competitors, buyers and suppliers?
- the financial / non financial barriers to entry?
- levels of industry profitability and relative performance of individual firms?
- significant customer segements, level of demand and how likely to change?
- the needs and wants of each customer segment?
- motivations for making a purchase?
- how loyal are customers?
- customer level of awareness and their perseption of each industry player?
Concentrate strategic attention on most important force – position to defend rivals – influence forces trough strategies – anticipate changes – generate success in long-term
Government influence – identifying rapid change – weight of forces – cooperation/partnership links
To identify the key competitive forces affecting a business
For predicting future industry structure and develop future competitive strategies
Enable easy comparison between industries/segments
Source of Porter’s Five Forces: