Porter Five Forces Analysis
Porter Five Forces Analysis
Porter Five Forces Analysis
This five forces analysis, is just one part of the complete Porter strategic models. The other elements are the value chain and the generic strategies. Porter developed his Five Forces analysis in reaction to the then-popular SWOT analysis, which he found un-rigorous and ad hoc. Porter's five forces is based on the Structure-ConductPerformance paradigm in industrial organizational economics. It has been applied to a diverse range of problems, from helping businesses become more profitable to helping governments stabilize industries.
Five forces
Threat of new competition
Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will tend towards zero (perfect competition).
The existence of barriers to entry (patents, rights, etc.) The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily. Economies of product differences Brand equity Switching costs or sunk costs Capital requirements Access to distribution Customer loyalty to established brands Absolute cost Industry profitability; the more profitable the industry the more attractive it will be to new competitors
Buyer propensity to substitute Relative price performance of substitute Buyer switching costs Perceived level of product differentiation Number of substitute products available in the market Ease of substitution. Information-based products are more prone to substitution, as online product can easily replace material product. Substandard product
Buyer concentration to firm concentration ratio Degree of dependency upon existing channels of distribution Bargaining leverage, particularly in industries with high fixed costs Buyer switching costs relative to firm switching costs Buyer information availability Availability of existing substitute products Buyer price sensitivity Differential advantage (uniqueness) of industry products RFM Analysis
Supplier switching costs relative to firm switching costs Degree of differentiation of inputs Impact of inputs on cost or differentiation Presence of substitute inputs Strength of distribution channel Supplier concentration to firm concentration ratio Employee solidarity (e.g. labor unions) Supplier competition - ability to forward vertically integrate and cut out the BUYER
Ex.: If you are making biscuits and there is only one person who sells flour, you have no alternative but to buy it from him.
Sustainable competitive advantage through innovation Competition between online and offline companies Level of advertising expense Powerful competitive strategy Flexibility through customization, volume and variety