Mtm4 White Paper Industry Analysis featuring the 5 Forces

1. BCG Growth/Share Portfolio Matrix
ITOTW 1
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Industry Analysis (Featuring the 5 Forces)
Intelligence Collaborative - Mastering the Methods Series

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This White Paper is #5 in a series of intelligence methods being offered to members of the
Intelligence Collaborative. It was developed by Dr. Craig S. Fleisher to provide a concise overview
of how to apply key intelligence methods to support analysis. Although every effort is made to
ensure that the information is accurate and fit for its purpose, the author and Aurora WDC make
no implied or explicit warranties as to its applicability or use in your particular work context.
Please direct any questions about this paper to its author at the following:
Craig S. Fleisher, Ph.D.
Aurora WDC
Email: craig.fleisher@aurorawdc.com
http://IntelCollab.com
Other White Papers are available on a regular basis from http://IntelCollab.com.Related Methods
in the series are:
Issue Analysis
Product Life Cycle Analysis
Scenario Analysis
Copyright ©2013 Intelligence Collaborative powered by Aurora WDC. To order copies or request permission to
reproduce materials, please call Dr. Craig Fleisher at +1.608.630.5869, write to him at Intelligence Collaborative
powered by Aurora WDC, 215 Martin Luther King Blvd #32, Madison, Wisconsin, 53701, USA or go to
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Abstract
Business unit analysts and managers study their industry's characteristics since an industry's structure
determinesitsrelativeeconomicattractivenessandhence, the profit potential of all companies within
that particular industry. According to Harvard University Professor Michael Porter, industry analysis
featuring the five corners will help you determine any strategic modifications needed to enhance
profitabilityof an incumbent company, or help you determine whether your company should enter or
exit an industry in the first place. The model visually looks like the following figure:
The Method’s Primary Value
All industriesare notequal intermsof the profitabilityfirms can earn in them. Michael Porter provided
a frameworkthatmodelsanindustryasbeinginfluencedbyfive forces.The astute analyst and strategic
business managers who seek to develop an edge over rival firms can use this model to better
understand the industry context in which the firm operates.
Overview of the Method
The model requiresthe analysttounderstandfiveforces that acting together determines the nature of
competition in a focal industry. Each of the model's five components, (1) Threat of New Entrants, (2)
Threat of Substitutes,(3) BargainingPowerof Suppliers, (4) BargainingPower of Buyers, and (5) Degree
of Competitive Rivalry have measurable components which classify each force as having a "Low,"
"Moderate," or "High" strength. The collective strength of the five forces then determines how
attractive the industry is to potential entrants. Each of these forces is briefly described below:

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Threat of New Entrants - The easier it is for new companies to enter the industry, the more cutthroat
competition there will be. Factors that can limit the threat of new entrants are known as barriers to
entry. Some examples include:
 Existing loyalty to major brands
 Government inhibitions or regulations
 High costs to switch from one provider to another
 High fixed costs
 Incentives for using a particular buyer (such as frequent shopper programs)
 Resource unavailability
The Threat of Substitutes – This force examines the likelihood that an industry buyer will switch to a
competitiveproductorservice froma differentindustry. If the costof switchingislow,thenthis poses a
serious threat. The extent of the threat depends upon:
 Customer loyalty levels and switching costs
 The extent to which the substitute’s price and performance compares with the industry’s
product
 The willingness of customers to switch
Bargaining Power of Suppliers - This is how much pressure suppliers can place on a business. If one
supplierhasalarge enoughimpacttoaffecta company'smarginsand volumes,thenitholdssubstantial
power. Here are a few reasons that suppliers might have power:
 Switching to another (competitive) input will cost too much
 The product is integral to the buyer’s ability to produce its product or service
 The supplying industry has a higher profitability than the buying industry
 There are only a few suppliers of a specialized product
 There exist no or very few viable substitutes
Bargaining Power of Buyers - This examines how much influence customers can place on a company’s
offerings. If a customer has a large enough impact to affect a company's margins or volumes, then the
customer holds substantial power. Here are a few reasons that customers might have power:
 Customers are price sensitive
 Customer purchases large volumes of the product
 It is easy to switching to another competitive product
 There are only a few buyers
 The product is less important to buyers; they can do without it for some period of time
Degree of CompetitiveRivalry - Thisdescribesthe intensityof competition existing between incumbent
firms “battling” for customers within an industry. Companies within highly competitive industries
generallyearnlow returns because of suffering from the high cost of competition. Highly competitive
markets are generally characterized by:
 Many rivals of similar size (economists call this concept as nearing perfect competition)
 There exists little to no differentiation between the products and services offered to buyers
 The industryis mature,slowgrowing;companiescanonly grow by taking customers from rivals

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The analystexaminesthe forcesindividually,and then together, to determine the impact they have on
industry attractiveness, and potential profitability. The end goal is to participate in and help to shape
industry forces in more attractive ways so that your business achieves better profitability.
Where the Method Fits in Planning and Strategy
Industry Analysis featuring the 5 Forces is significant in terms of their potential impact on strategy
formulation.The potential of these forces to impact profitability is different from industry to industry.
These forcesjointlydetermine the profitability of industry because they shape the prices which can be
charged,the costs whichcan be borne,and the investmentrequiredtocompete in the industry. Before
making strategic decisions, the managers should use the five forces framework to determine the
competitive structure of industry. Decisions should be make that weaken forces which harm
profitability, strengthen forces that increase it, and otherwise make choices that leverage forces that
can uniquely help their firm succeed as a competitor.

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Cautions with Applying this Method
The biggest error analysts make in applying Porter’s model is not to define the industry at the line of
businesslevel.The model wasnotdesignedtodeal withstrategicgroups,ormulti-businesscompetition.
Also, applying it to a company will also produce misleading results in almost every case.
The model is about structural forms of advantage. It wasn’t designed to account for other forms
(capabilities, resources-based) factors.
Also, the five forces model largely overlooks the role of innovation as well as the significance of
individual firm differences.
Porter’s original formulation of the five forces was viewed by some to have ignored other factors. For
example, a sixth significant factor called the influence of complementors refers to the reliance that
developsbetweenthe companies indifferent industries (known today as adjacencies) whose products
work in combination with each other. Strong complementors can have a strong positive effect on the
industry if their joint ecosystem works to the benefit of both.
It presents a stagnant view of competition. For the model to be more useful, analysts need to
complementitwithothertemporally-sensitivemethodslike forecasting, futures, or scenarios that turn
the “photograph” of an industry’s structure into a “moving picture” of it!
Applying the Method
I alwaysrecommendthatanalystsstartwiththe endgoal in mind.The primary objective of a successful
strategybasedon IndustryAnalysisfeaturingthe five forcesshouldbe toidentifyand take advantage of
the existingcompetitive forcesinamannerthatwill enhance the competitive position of the company.
Decisions and actions must be aligned with that goal, or else the analysis is likely to turn into an
impractical exercise at best, and waste valuable resources like executive’s time, even worse.
1. Define yourindustryatthe line of businesslevel. Gettingthisdefinitionscopedright,andagreed
uponinternally,isacrucial firststep. Remember, you are analysing an industry, not a company
(unless the company has a monopoly, a rare circumstance, these days).
2. Identifythe keystakeholdersineachof the five categories.Forexamples,whoare the suppliers
that you are trying to determine the level of bargaining power for? Who/what are the
substitutes for your focal industry/market’s products/services?
3. Thoroughly assess each of the five forces individually. Each should be rated either “low,”
“medium” or “high.”
4. Consider the aggregate impact of the forces. Answer “is the industry attractive in terms of an
incumbent business achieving acceptable levels of profitability?” (see figure below)
5. Make decisionsaboutwhatyoucan doand how your company’sstrategy take advantage of the
existing forces in a manner that will enhance the competitive position of the company.

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Here are some other questions to think about when developing your Five Forces analysis.
Before
 What exactly are you aiming to achieve? Be clear about your expectations.
 What is the scope of this analysis? Where does the industry begin and end relative to each of
the five forces?
 Who can potentially benefit from this?
 Scope your industry at the line of business level. This tool looks at industries, not companies.
During
 Focus on the present or future, not on the past. I usually recommend doing two of these, one
for the present,andone projected out 2, 3 or 5 years. Trying to understand how the forces will
change industry competition is one of the best value-adds from doing this analysis.
 Do not play the "blame game." Stay focused on what can be improved, not what should have
been improved in past projects.
 Remember to analyze both the positive and the negatives. Few industries will be attractive
across the board.
 Be objective and open to new ideas, changes in thinking, etc.
After
 What are the lessons learned? How can the company use them in the future?
 How has this analysis assisted you, your project and/or organization?
 Have you been able to implement any of the recommendations?
 Remembertoutilize the analysisandyourlearningfromitinfuture projects,if/whenapplicable.
Complementary Methods
 Competitor Profiling
 Driving Forces Analysis

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 Forecasting
 Strategic Group Analysis
 STEEP/PEST analysis
 SWOT analysis
 Trend analysis
 Value Chain Analysis
Additional Resources
See chapter 7 (pg. 109-126) on Five Forces Industry Analysis in the (2013) book Analysis without
Paralysis: 12 Tools to Make Better Strategic Decisions, 2nd
Ed., by Babette E. Bensoussan and Craig S.
Fleisher, Upper Saddle River, NJ: FT Press.
Businessand CompetitiveAnalysis:EffectiveApplication of New and Classic Methods by Craig S. Fleisher
and Babette Bensoussan, 2007, Upper Saddle River, NJ: FT Press.
Strategicand CompetitiveAnalysis:Methodsand TechniquesforAnalyzing BusinessCompetition byCraig
S. Fleisher and Babette Bensoussan, 2003, Upper Saddle River, NJ: Pearson/Prentice Hall.
Standard &Poor'sIndustry Surveys:Thisis usually the best place to start. Use it to learn about industry
trends,challenges,externalmarket drivers, operations, and key competitors. It covers over fifty major
global industries.
Datamonitor360 (was called Marketline): This offers global and country-specific industry profiles,
drawingonDatamonitor'smarketresearch reports of a large range of industry sectors. Includes a basic
Five Forcesanalysis based on Datamonitor's primary research; helps analysts conduct due diligence to
validate assumptions.
First Research: Not as deep an analysis of the overall industry as S&P, but focuses on business
challenges, drivers and opportunities provides important data often left out by others. It covers 200+
broad industries and sectors.
IndustryAssociations: Most major industry associations publish industry surveys, outlooks, aggregate
data, benchmarks and more. While many post some information on the web, explore purchasing
publications (most are very reasonably priced) and speak to a staff for additional leads.
Industry Trade Magazine "Special Issues": Look at core industry trade magazines for special features,
such as annual "state-of-the-industry", top company rankings, and more. Use Factiva, Business Source
Complete and the actual magazine web site to locate.
Alan S. Michael’s LinkedIn group called “Corporate Planning, Strategy, and Strategic Market
Implementation” often has worthwhile discussions about industry analysis.