This document outlines Michael Porter's Five Forces framework for analyzing the competitive environment of an industry. It describes the five competitive forces that determine the profitability of an industry: the threat of new entrants, the threat of substitute products, the bargaining power of suppliers, the bargaining power of buyers, and the intensity of rivalry among existing competitors. For each force, it discusses factors that influence its strength and implications for an industry's long-term profit potential. The framework helps assess the attractiveness of an industry and identify opportunities and threats from changes in the competitive forces.

1. A Framework for
Industry Analysis
“Five Forces” model
- Michael Porter

2. Parameters of Strategy

3. The Five Competitive Forces
That Shape Strategy
Michael Porter, Harvard Business Review, 2008

4. Uses for the Five Forces model
 What is the long-term profit potential for
the industry?
– Is this an attractive industry in which to
participate at all?
 If so, where within the industry are these
forces most favorable to long-term profit?
 How will changes in these five forces
create opportunities / threats?

5. Threat of New Entrants
 The perceived likelihood that new players
will enter an industry (successfully or not).
– A function of barriers to entry which can be
• Advantages of being there already (incumbency)
– Economies of scale, network effects
– Experience, first mover advantages
• Customer loyalty / switching costs
• Capital requirements / minimum economic scale
• Access to key resources, distribution channels, etc.
• Government policy

6. Implications of
Threat of New Entrants
 High threat of new entrants is negative for
long-term industry profitability.
 Low threat of new entrants is positive for
long-term industry profitability.

7. Threat from
Substitute Products
 A substitute product is a different
product category which can deliver
the same end benefit to the user as the
industry’s product
– Extent of substitutes depends on
definition of the industry’s product
– Threat from substitutes depends on price
/ performance tradeoffs in relation to the
industry’s product

8. Implications of
Threat from Substitutes
 Availability and suitability of
substitute products as an alternative
tends to limit industry profitability.

9. Bargaining Power of Suppliers
 The ability (and propensity) of Suppliers to
capture value from the sale of the end
product through their own pricing.
– Depends on
• Industry switching costs
• Supplier differentiation / availability of substitutes
• Credible threat of forward integration
• Supplier concentration relative to the industry
• Suppliers reliance on the industry

10. Implications of
Bargaining Power of Suppliers
 High bargaining power of suppliers is
negative for long-term industry
profitability.
 Low bargaining power of suppliers is
positive for long-term industry
profitability.

11. Bargaining Power of Buyers
 Ability (and propensity) of Buyers to
bargain away industry profits by
demanding low prices
– Depends on
• Buyers switching costs
• Buyer concentration relative to the industry
• Credible threat of backward integration
• Importance of the product to buyers in terms of
cost and / or quality of their own product

12. Implications of
Bargaining Power of Buyers
 High bargaining power of buyers is
negative for long-term industry
profitability.
 Low bargaining power of buyers is
positive for long-term industry
profitability.

13. Industry Rivalry
 The intensity and nature of rivalry among
current industry participants
– Depends on
• Opportunities for distinctive strategies
• Customer switching costs
• Industry growth rate / capacity relative to demand
• Fixed cost structure / perishable product
• Barriers to exit
• Idiosyncrasies of industry participants

14. Industry Rivalry
 High level of industry rivalry is negative
for long-term industry profitability.
 Low level of industry rivalry is positive for
long-term industry profitability.

15. Uses for the Five Forces model
 What is the long-term profit potential for
the industry?
– Is this an attractive industry in which to
participate at all?
 If so, where within the industry are these
forces most favorable to long-term profit?
 How will changes in these five forces
create opportunities / threats?

16. The Five Competitive Forces
That Shape Strategy
Michael Porter, Harvard Business Review, 2008

17. Key Concepts
 Bargaining power
 Barriers to entry / exit
 Switching costs
 Economies of scale / network effects
 Cost structure
 Forward / backward integration