Michael Porter developed the Five Forces model for analyzing industry competition and profitability. The five competitive forces are: 1) rivalry among existing competitors, 2) threat of new entry, 3) threat of substitute products, 4) bargaining power of suppliers, and 5) bargaining power of buyers. The model helps evaluate an industry's attractiveness by examining the strength of each force and impact on profitability. Determinants that influence the competitive forces are also identified such as barriers to entry, supplier/buyer concentration, and product differentiation.
Pre Engineered Building Manufacturers Hyderabad.pptx
Michael Porter's 5 forces model
1. Michael Porter’s 5 Forces Model
STRATEGIC MANAGEMENT AND POLICY ANALYSIS
Arch. Maribel C. Tubera – DBA Student
2. Michael E. Porter
Harcard professor who propelled the
concept of industry environment into the
foreground of strategic thought and
business planning.
3. The 5 forces of competion model
It expands the area for competitive analysis;
It recognizes that suppliers can become firms’
competitors (by integrating forward), as can
buyers (by integrating backward).
4. The 5 forces of competition model
1. Rivalry among competing firms
2. Potential entry of new competitors
3. Potential development of substitute
products
4. Bargaining power of suppliers
5. Bargaining power of consumers
5. Forces driving industry competition
Industry
Competitiors
Intensity of rivalry
Buyers
New Entrants
Suppliers
Substitues
Treat of new entrants
Bargaining power of buyers
Treat of substitutes
Bargaining power of
suppliers
6. Determinants of Entry
Economies of scale
Propriety product differences
Brand identity
Switching costs
Capital requirements
Access to distribution
Absolute cost advantages
Government policy
Expected retaliation
Propriety curve
– Access to necessary inputs
– Propriety low-cost product design
8. Determinants of supplier power
Differentiation of inputs
Switching costs of suppliers and firms in the
industry
Presence of substitute inputs
Supplier concentration
Importance of volume to supplier
Cost relative to total purchases in the industry
Impact of inputs on cost or differentiation
Treat of forward integration relative to treat of
backward integration by firms in the industry
9. Determinants of buyer power
Bargaining leverage
Buyer concentration versus firm
concentration
Buyer volume
Buyer switching costs relative to
firm switching costs
Buyer information
Ability to backward integrate
Substitute products
Pull-through
Price sensitivity
Price/total puchases
Product differences
Brand identity
Impact on quality/performance
Buyer profits
Decision makers’ incentives
10. Determinants of substituion threat
Relative price performance if substitutes
Switching costs
Buyer propensity to substitute
11. 1. Intensity of rivalry among competitors
It is the most powerful of the five
competitive forces;
Competitors rivalry intensifies when a firm
is challenged by a competitors’ actions or
when a company recognizes an
opportunity to improve its market position.
12. Common mistakes in identifying competitors
1. Overemphasizing current and known competitors while giving inadequate attention
to potential entrants;
2. Overemphasizing large competitors while ignoring small competitors;
3. Overlooking potential international competitors;
4. Assuming that competitors will continue to behave in the same way they have
behaved in the past;
5. Misreading signals that may indicate a shift in the focus of competitors or a
refinement of their present strategies or tactics;
6. Overemphasizing competitors’ financial resources, market position, and strategies
while ignoring their intangible assets, such as a top management team;
7. Assuming that all of the firms in the industry are subject to the same constraints or
are open to the same opportunities;
8. Believing that the purpose of strategy is to outsmart the competition, rather than to
satisfy customer needs and expectations.
13. 2. Threat of new entrants
It is important because they can threaten
the market share of existing competitors;
When the threat of new firms entering the
market is strong, incumbent firms
generally fortify their positions and take
actions to deter new entrants.
14. Barriers to entry
1. Economies of scale- it enhances firm’s flexibility.
2. Product differentiation – overtime, consumers may believe that firm’s
product is unique.
3. Capital requirements – it requires resources to invest.
4. Switching cost – it can vary as a function of time.
5. Access to distribution channels
6. Cost disadvantages indepndent of scale
7. Government policy
8. Expected retaliation
15. 3. Potential development of substitute products
These are goods or services from outside a
given industry that perform similar or the
same functions as a product that the
industry produces.
16. 4. Bargaining power of suppliers
It affects the intensity of competition in an
industry, especially when there is a large
number of suppliers, when there are only a
few good substitute raw materials or when
the cost of switching raw materials is
especially costly.
17. Supplier group is powerful when:
1. It is dominated by a few large companies and is more concentrated
than the industry to which it sells;
2. Satisfactory substitute products are not available to industry firms;
3. Industry firms are not a significant customer for the supplier
group;
4. Suppliers’ goods are critical to buyers’ marketplace success;
5. The effectiveness of suppliers’ products has created high
switching costs for industry firms;
6. It poses a credible threat to integrate forward into the buyers’
industry. Credibility is enhanced when suppliers have substantial
resources and provide a highly differentiated product.
18. 5. Bargaining power of consumers
Customers are powerful when:
1. They purchase a large portion of an industry’s total
output;
2. The sales or product being purchased account for a
significant portion of the sellers annual revenues;
3. They could switch to another product at little cost;
4. The industry’s products are undifferentiated or
standardized, and the buyers pose a credible threat if
they were to integrate backward into the sellers’
industry.
19. 3 steps for using Porter’s 5-forces model
1. Identify key aspects or elements of each
competitive force that impact the firm;
2. Evaluate how strong and important. Each
element is for the firm;
3. Decide whether the collective strength of
the elements is woth the firm entering or
staying in the industry.