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

2. Parameters of Strategy

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

4. 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?

5. 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

6. 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.

7. 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

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

9. 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

10. 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.

11. 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

12. 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.

13. 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

14. 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.

15. 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?

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

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