Five Forces (Porter)
Five Forces Analysis

Outside-in Business Strategy. Explanation of the Five Competitive Forces of Michael Porter.

What is the Five Forces model of Porter? Description

The Five Forces model of Porter is an Outside-in business unit strategy tool that is used to make an analysis of the attractiveness (value) of an industry structure. The Competitive Forces analysis is made by the identification of 5 fundamental competitive forces:

Entry of competitors. How easy or difficult is it for new entrants to start competing, which barriers do exist.
Threat of substitutes. How easy can a product or service be substituted, especially made cheaper.
Bargaining power of buyers. How strong is the position of buyers. Can they work together in ordering large volumes.
Bargaining power of suppliers. How strong is the position of sellers. Do many potential suppliers exist or only few potential suppliers, monopoly?
Rivalry among the existing players. Does a strong competition between the existing players exist? Is one player very dominant or are all equal in strength and size.

Sometimes a sixth competitive force is added:

Government.

Porter's Competitive Forces model is probably one of the most often used business strategy tools. It has proven its usefulness on numerous occasions. Porter's model is particularly strong in thinking Outside-in.

Threat of New Entrants depends on:

Economies of scale.
Capital / investment requirements.
Customer switching costs.
Access to industry distribution channels.
Access to technology.
Brand loyalty. Are customers loyal?
The likelihood of retaliation from existing industry players.
Government regulations. Can new entrants get subsidies?

Threat of Substitutes depends on:

Quality. Is a substitute better?
Buyers' willingness to substitute.
The relative price and performance of substitutes.
The costs of switching to substitutes. Is it easy to change to another product?

Bargaining Power of Suppliers depends on:

Concentration of suppliers. Are there many buyers and few dominant suppliers? Compare: Kraljic Model.
Branding. Is the brand of the supplier strong?
Profitability of suppliers. Are suppliers forced to raise prices?
Suppliers threaten to integrate forward into the industry (for example: brand manufacturers threatening to set up their own retail outlets).
Buyers do not threaten to integrate backwards into supply.
Role of quality and service.
The industry is not a key customer group to the suppliers.
Switching costs. Is it easy for suppliers to find new customers?

Bargaining Power of Buyers depends on:

Concentration of buyers. Are there a few dominant buyers and many sellers in the industry?
Differentiation. Are products standardized?
Profitability of buyers. Are buyers forced to be tough?
Role of quality and service.
Threat of backward and forward integration into the industry.
Switching costs. Is it easy for buyers to switch their supplier?

Intensity of Rivalry depends on:

The structure of competition. Rivalry will be more intense if there are lots of small or equally sized competitors; rivalry will be less if an industry has a clear market leader.
The structure of industry costs. Industries with high fixed costs encourage competitors to manufacture at full capacity by cutting prices if needed.
Degree of product differentiation. Industries where products are commodities (e.g. steel, coal) typically have greater rivalry.
Switching costs. Rivalry is reduced when buyers have high switching costs.
Strategic objectives. If competitors pursue aggressive growth strategies, rivalry will be more intense. If competitors are merely "milking" profits in a mature industry, the degree of rivalry is typically low.
Exit barriers. When barriers to leaving an industry are high, competitors tend to exhibit greater rivalry.

Strengths of the Five Competitive Forces Model. Benefits

The model is a strong tool for competitive analysis at industry level. Compare: PEST Analysis
It provides useful input for performing a SWOT Analysis.

Limitation of Porter's Five Forces model

Care should be taken when using this model for the following: do not underestimate or underemphasize the importance of the (existing) strengths of the organization (Inside-out strategy). See: Core Competence
The model was designed for analyzing individual business strategies. It does not cope with synergies and interdependencies within the portfolio of large corporations. See: Parenting Advantage
From a more theoretical perspective, the model does not address the possibility that an industry could be attractive because certain companies are in it.
Some people claim that environments which are characterized by rapid, systemic and radical change require more flexible, dynamic or emergent approaches to strategy formulation. See: Disruptive Innovation
Sometimes it may be possible to create completely new markets instead of selecting from existing ones. See: Blue Ocean Strategy

Overview of the Book "Competitive Strategy"

In Part I, Porter discusses the structural analysis of industries (with the five forces), the three generic competitive strategies (overall Cost Leadership, Focus, and Differentiation), offering an excellent framework for competitor analysis, competitive moves, strategy toward buyers and suppliers, structural analysis within industries (strategic groups, strategic mapping, mobility barriers), and industry evolution (life cycle, evolutionary processes).
In Part II, Porter discusses competitive strategy within various generic industry environments. Such as: fragmented industries (with no real market leader), emerging industries, mature industries, declining industries, and global industries.
In Part III, Porter discusses strategic decisions which businesses/firms can take. Such as: vertical integration (forward, backward, partnerships), capacity expansion, and entry into new industries/businesses.

Book: Michael E. Porter - Competitive Strategy -

Five Forces (Porter) | Five Forces Analysis Forum (23)

Who is the Buyer in the Internet Industry?
Can someone help to identify who plays the buyer role in the Internet industry? Is it the individual person? Or does it mean the buyer who acquires an Internet service? Like in the case of Google acquiring Youtube, is Google then one of the buyers in the Internet industry?
Thanks for your tips...

How to Deal with Competitors in Five Forces Analysis?
Okay I understand the five forces, but when I'm trying to apply the model, where do I place other competitive rivals of the firm?
For example, if I am doing a five force analysis on supermarkets, in the competitive rivalry do I name other supermarkets like Tesco, Sainsbury's and so on or do I input the level of rivalry such as there are a lot of large dominating companies?
I do not understand the application of the model fully if someone can help?

The Conclusion based on the Five Forces Model
Who can tell more about the conclusion based on the 5 forces model after you have analyzed all competitive forces?
How do you conclude whether an industry is attractive or not in terms of low, moderate and high competition of each force?

MEDIA as the 7th Force in Porter's Five Forces
If media is added it would complement the Porter model of forces, as the media today have become an inevitably interwoven phenomenon in our personal and organizational lives. Also it is a primary instrument to catalyze the other forces.

Apple Inc. and 5 Forces
Who can give some analysis about apple inc.'s use of Porter's five forces? Thank you...

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