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

Parameters of Strategy

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

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?

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 Note we must distinguish between

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.

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

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

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

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.

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

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.

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

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.

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?

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

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