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PorterfiveforcesanalysisWikipedia,thefreeencyclopedia

Porterfiveforcesanalysis
FromWikipedia,thefreeencyclopedia

Porterfiveforcesanalysisisaframework
toanalyzelevelofcompetitionwithinan
industryandbusinessstrategydevelopment.
Itdrawsuponindustrialorganization(IO)
economicstoderivefiveforcesthat
determinethecompetitiveintensityand
thereforeattractivenessofanIndustry.
Attractivenessinthiscontextreferstothe
overallindustryprofitability.An
"unattractive"industryisoneinwhichthe
combinationofthesefiveforcesactstodrive
downoverallprofitability.Avery
unattractiveindustrywouldbeone
AgraphicalrepresentationofPorter'sfiveforces
approaching"purecompetition",inwhich
availableprofitsforallfirmsaredrivento
normalprofit.ThisanalysisisassociatedwithitsprincipalinnovatorMichaelE.PorterofHarvard
University.
Porterreferredtotheseforcesasthemicroenvironment,tocontrastitwiththemoregeneraltermmacro
environment.Theyconsistofthoseforcesclosetoacompanythataffectitsabilitytoserveitscustomers
andmakeaprofit.Achangeinanyoftheforcesnormallyrequiresabusinessunittoreassessthe
marketplacegiventheoverallchangeinindustryinformation.Theoverallindustryattractivenessdoes
notimplythateveryfirmintheindustrywillreturnthesameprofitability.Firmsareabletoapplytheir
corecompetencies,businessmodelornetworktoachieveaprofitabovetheindustryaverage.Aclear
exampleofthisistheairlineindustry.Asanindustry,profitabilityislowandyetindividualcompanies,
byapplyinguniquebusinessmodels,havebeenabletomakeareturninexcessoftheindustryaverage.
Porter'sfiveforcesincludethreeforcesfrom'horizontal'competition:thethreatofsubstituteproducts
orservices,thethreatofestablishedrivals,andthethreatofnewentrantsandtwoforcesfrom'vertical'
competition:thebargainingpowerofsuppliersandthebargainingpowerofcustomers.
PorterdevelopedhisFiveForcesanalysisinreactiontothethenpopularSWOTanalysis,whichhe
foundunrigorousandadhoc.[1]Porter'sfiveforcesisbasedontheStructureConductPerformance
paradigminindustrialorganizationaleconomics.Ithasbeenappliedtoadiverserangeofproblems,
fromhelpingbusinessesbecomemoreprofitabletohelpinggovernmentsstabilizeindustries.[2]Other
Porterstrategicframeworksincludethevaluechainandthegenericstrategies.

Contents
1Fiveforces
1.1Threatofnewentrants
1.2Threatofsubstituteproductsorservices
1.3Bargainingpowerofcustomers(buyers)
1.4Bargainingpowerofsuppliers
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1.5Intensityofcompetitiverivalry
2Usage
3Criticisms
4Seealso
5References
6Furtherreading

Fiveforces
Threatofnewentrants
Profitablemarketsthatyieldhighreturnswillattractnewfirms.Thisresultsinmanynewentrants,
whicheventuallywilldecreaseprofitabilityforallfirmsintheindustry.Unlesstheentryofnewfirms
canbeblockedbyincumbents(whichinbusinessreferstothelargestcompanyinacertainindustry,for
instance,intelecommunications,thetraditionalphonecompany,typicallycalledthe"incumbent
operator"),theabnormalprofitratewilltrendtowardszero(perfectcompetition).
Thefollowingfactorscanhaveaneffectonhowmuchofathreatnewentrantsmaypose:
Theexistenceofbarrierstoentry(patents,rights,etc.).Themostattractivesegmentisonein
whichentrybarriersarehighandexitbarriersarelow.Fewnewfirmscanenterandnon
performingfirmscanexiteasily.
Governmentpolicy
Capitalrequirements
Absolutecost
Costdisadvantagesindependentofsize
Economiesofscale
Economiesofproductdifferences
Productdifferentiation
Brandequity
Switchingcostsorsunkcosts
Expectedretaliation
Accesstodistribution
Customerloyaltytoestablishedbrands
Industryprofitability(themoreprofitabletheindustrythemoreattractiveitwillbetonew
competitors)

Threatofsubstituteproductsorservices
Theexistenceofproductsoutsideoftherealmofthecommonproductboundariesincreasesthe
propensityofcustomerstoswitchtoalternatives.Forexample,tapwatermightbeconsidereda
substituteforCoke,whereasPepsiisacompetitor'ssimilarproduct.Increasedmarketingfordrinkingtap
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watermight"shrinkthepie"forbothCokeandPepsi,whereasincreasedPepsiadvertisingwouldlikely
"growthepie"(increaseconsumptionofallsoftdrinks),albeitwhilegivingPepsialargersliceatCoke's
expense.Anotherexampleisthesubstituteoftraditionalphonewithasmartphone.
Potentialfactors:
Buyerpropensitytosubstitute
Relativepriceperformanceofsubstitute
Buyerswitchingcosts
Perceivedlevelofproductdifferentiation
Numberofsubstituteproductsavailableinthemarket
Easeofsubstitution
Substandardproduct
Qualitydepreciation
Availabilityofclosesubstitute

Bargainingpowerofcustomers(buyers)
Thebargainingpowerofcustomersisalsodescribedasthemarketofoutputs:theabilityofcustomersto
putthefirmunderpressure,whichalsoaffectsthecustomer'ssensitivitytopricechanges.Firmscantake
measurestoreducebuyerpower,suchasimplementingaloyaltyprogram.Thebuyerpowerishighif
thebuyerhasmanyalternatives.Thebuyerpowerislowiftheyactindependentlye.g.Ifalargenumber
ofcustomerswillactwitheachotherandasktomakepriceslowthecompanywillhavenootherchoice
becauseoflargenumberofcustomerspressure.
Potentialfactors:
Buyerconcentrationtofirmconcentrationratio
Degreeofdependencyuponexistingchannelsofdistribution
Bargainingleverage,particularlyinindustrieswithhighfixedcosts
Buyerswitchingcostsrelativetofirmswitchingcosts
Buyerinformationavailability
Forcedownprices
Availabilityofexistingsubstituteproducts
Buyerpricesensitivity
Differentialadvantage(uniqueness)ofindustryproducts
RFM(customervalue)Analysis
Thetotalamountoftrading

Bargainingpowerofsuppliers
Thebargainingpowerofsuppliersisalsodescribedasthemarketofinputs.Suppliersofrawmaterials,
components,labor,andservices(suchasexpertise)tothefirmcanbeasourceofpoweroverthefirm
whentherearefewsubstitutes.Ifyouaremakingbiscuitsandthereisonlyonepersonwhosellsflour,
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youhavenoalternativebuttobuyitfromthem.Suppliersmayrefusetoworkwiththefirmorcharge
excessivelyhighpricesforuniqueresources.
Potentialfactorsare:
Supplierswitchingcostsrelativetofirmswitchingcosts
Degreeofdifferentiationofinputs
Impactofinputsoncostordifferentiation
Presenceofsubstituteinputs
Strengthofdistributionchannel
Supplierconcentrationtofirmconcentrationratio
Employeesolidarity(e.g.laborunions)
Suppliercompetition:theabilitytoforwardverticallyintegrateandcutoutthebuyer.

Intensityofcompetitiverivalry
Formostindustriestheintensityofcompetitiverivalryisthemajordeterminantofthecompetitiveness
oftheindustry.
Potentialfactors:
Sustainablecompetitiveadvantagethroughinnovation
Competitionbetweenonlineandofflinecompanies
Levelofadvertisingexpense
Powerfulcompetitivestrategy
Firmconcentrationratio
Degreeoftransparency

Usage
StrategyconsultantsoccasionallyusePorter'sfiveforcesframeworkwhenmakingaqualitative
evaluationofafirm'sstrategicposition.However,formostconsultants,theframeworkisonlyastarting
pointor"checklist."Theymightusevaluechainoranothertypeofanalysisinconjunction.[3]Likeall
generalframeworks,ananalysisthatusesittotheexclusionofspecificsaboutaparticularsituationis
considerednave.
AccordingtoPorter,thefiveforcesmodelshouldbeusedatthelineofbusinessindustrylevelitisnot
designedtobeusedattheindustrygrouporindustrysectorlevel.Anindustryisdefinedatalower,more
basiclevel:amarketinwhichsimilarorcloselyrelatedproductsand/orservicesaresoldtobuyers.(See
industryinformation.)Afirmthatcompetesinasingleindustryshoulddevelop,ataminimum,onefive
forcesanalysisforitsindustry.Portermakesclearthatfordiversifiedcompanies,thefirstfundamental
issueincorporatestrategyistheselectionofindustries(linesofbusiness)inwhichthecompanyshould
competeandeachlineofbusinessshoulddevelopitsown,industryspecific,fiveforcesanalysis.The
averageGlobal1,000companycompetesinapproximately52industries(linesofbusiness).

Criticisms
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Porter'sframeworkhasbeenchallengedbyotheracademicsandstrategistssuchasStewartNeill.
Similarly,thelikesofABC,KevinP.Coyne[1]
(http://www.businessweek.com/bios/Kevin_P._Coyne.htm)andSomuSubramaniamhavestatedthat
threedubiousassumptionsunderliethefiveforces:
Thatbuyers,competitors,andsuppliersareunrelatedanddonotinteractandcollude.
Thatthesourceofvalueisstructuraladvantage(creatingbarrierstoentry).
Thatuncertaintyislow,allowingparticipantsinamarkettoplanforandrespondtocompetitive
behavior.[4]
AnimportantextensiontoPorterwasfoundintheworkofAdamBrandenburgerandBarryNalebuffof
YaleSchoolofManagementinthemid1990s.Usinggametheory,theyaddedtheconceptof
complementors(alsocalled"the6thforce"),helpingtoexplainthereasoningbehindstrategicalliances.
TheideathatcomplementorsarethesixthforcehasoftenbeencreditedtoAndrewGrove,formerCEO
ofIntelCorporation.Accordingtomostreferences,thesixthforceisgovernmentorthepublic.Martyn
RichardJones,whilstconsultingatGroupeBull,developedanaugmented5forcesmodelinScotlandin
1993.ItisbasedonPorter'smodelandincludesGovernment(nationalandregional)aswellasPressure
Groupsasthenotional6thforce.ThismodelwastheresultofworkcarriedoutaspartofGroupeBull's
KnowledgeAssetManagementOrganisationinitiative.
Porterindirectlyrebuttedtheassertionsofotherforces,byreferringtoinnovation,government,and
complementaryproductsandservicesas"factors"thataffectthefiveforces.[5]
Itisalsoperhapsnotfeasibletoevaluatetheattractivenessofanindustryindependentoftheresourcesa
firmbringstothatindustry.Itisthusargued(Wernerfelt1984)[6]thatthistheorybecoupledwiththe
ResourceBasedView(RBV)inorderforthefirmtodevelopamuchmoresoundstrategy.Itprovidesa
simpleperspectiveforaccessingandanalyzingthecompetitivestrengthandpositionofacorporation,
businessororganization.

Seealso
NationalDiamond
Valuechain
Porter'sfourcornersmodel
Industryclassification
Nonmarketforces

References
1. MichaelPorter,NicholasArgyres,AnitaM.McGahan,"AnInterviewwithMichaelPorter",TheAcademyof
ManagementExecutive16:2:44atJSTOR(http://www.jstor.org/stable/4165839)
2. MichaelSimkovic,CompetitionandCrisisinMortgageSecuritization(http://ssrn.com/abstract=1924831)
3. Tang,David(21October2014)."IntroductiontoStrategyDevelopmentandStrategyExecution"
(http://flevy.com/blog/introductiontostrategydevelopmentandstrategyexecution/).Flevy.Retrieved
2November2014.
4. KevinP.CoyneandSomuSubramaniam,"Bringingdisciplinetostrategy",TheMcKinseyQuarterly,1996,
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Number4,pp.1425
5. MichaelE.Porter."TheFiveCompetitiveForcesthatShapeStrategy",HarvardBusinessReview,January
2008,p.86104.PDF(http://hbr.org/2008/01/thefivecompetitiveforcesthatshapestrategy/ar/1)
6. Wernerfelt,B.(1984),Aresourcebasedviewofthefirm,StrategicManagementJournal,Vol.5,(April
June):pp.171180

Furtherreading
Coyne,K.P.andSujitBalakrishnan(1996),Bringing
disciplinetostrategy,TheMcKinseyQuarterly,No.4.
Porter,M.E.(MarchApril1979)HowCompetitiveForces

WikimediaCommonshas
mediarelatedtoPorter's
FiveForcesModel.

ShapeStrategy,HarvardBusinessReview.
Porter,M.E.(1980)CompetitiveStrategy,FreePress,NewYork,1980.
Porter,M.E.(2008)TheFiveCompetitiveForcesThatShapeStrategy,HarvardbusinessReview,
January2008.
Ireland,Hoskisson,UnderstandingBusinessStrategy.SOUTHWESTERN.
RainerandTurban,IntroductiontoInformationSystems(2ndedition),Wiley,2009,pp3641.
KotlerPhilip,MarketingManagement,PrenticeHall,Inc.1997
Mintzberg,AhlstrandandLampel,StrategySafari1998.
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