Five Forces Porter

Knowledge Center

   

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

Contents

  1. Summary
  2. Forum
  3. Best Practices
  4. Expert Tips
  5. Resources
  6. Print

Five Competitive Forces (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:

  1. Entry of competitors. How easy or difficult is it for new entrants to start competing, which barriers do exist.
  2. Threat of substitutes. How easy can a product or service be substituted, especially made cheaper.
  3. Bargaining power of buyers. How strong is the position of buyers. Can they work together in ordering large volumes.
  4. Bargaining power of suppliers. How strong is the position of sellers. Do many potential suppliers exist or only few potential suppliers, monopoly?
  5. 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:

  1. 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
  Porter's 5 Forces Framework in Non-competitive Situations?
Hi, what part of Porter's five forces framework is...
     
 
  Why Porter's Monitor Consulting Company Failed
In 1983, Michael Porter co-founded his consulting ...
     
 
  The New Industrial Economics School
Industrial Economics (IE) involves the stud...
     
 
  Five Forces in Accounting Services Industry
What organizations / individuals / items contribut...
     
 
  Does Competition Increase the Need for Segmentation?
When a market becomes more and more competitive, d...
     
 
  Who is the Buyer in the Internet Industry?
Can someone help to identify who plays the buyer r...
     
 
  How to Deal with Competitors in Five Forces Analysis?
Okay I understand the five forces, but when I'm tr...
     
 
  The Conclusion based on the Five Forces Model
Who can tell more about the conclusion based on th...
     
 
  MEDIA as the 7th Force in Porter's Five Forces
If media is added it would complement the P...
     
 
  Apple Inc. and 5 Forces
Who can give some analysis about apple inc.'s use ...
     
 
  Porter's Five Forces is Excellent Tool
Porter's' five force theory is an excellent tool t...
     
 
  5 Forces in Emerging Industries
How can Porter's five forces model be applied with...
     
 
  Evolution in Our Expectations of Business and Porter's Model
One item that does not easily float to consciousne...
     
 
  Substitution in the Five Forces Model
I am interested in 'substitutes' such as:
     
 
  Porter 5 Forces and E-Commerce
How can we amplify the model into a e-commerce bus...
     
 

Five Forces (Porter) | Five Forces Analysis Special Interest Group


Special Interest Group

Five Forces (Porter) | Five Forces Analysis Education & Events


Find Trainings, Seminars and Events


Best Practices - Five Forces (Porter) | Five Forces Analysis Premium
  Basis of Five Forces Strategies
The five forces theory looks at strategy formulati...
     
 
  Bargaining Power of Buyers. Examples
What precisely is bargaining power of buyers? Can ...
     
 
  Business Networking: Forces are Getting Connected
I think, there is an interesting phenomena around ...
     
 
  Measuring / Calculating the Five Forces of Porter?
Hi, can somebody help me how to calculate the co-e...
     
 
  How does Information Technology alter Porter's 5 Forces
How does Information Technology alter each of the ...
     
 
  Government as 6th Force in Porter's Five Forces
Who can give an explanation of the government fact...
     
 
  Assumptions of the Five Forces model
The Five Forces model has two basic premises. The ...
     
 

Expert Tips - Five Forces (Porter) | Five Forces Analysis Premium
 

Influence of Internet

In his article called "Strategy and the Interne...
Usage (application): Impact of Internet on Industry
 
 
 

5 Forces model is a snapshot

Note that the 5 forces framework of Porter is a sn...
Usage (application): Analyzing industry structure
 
 
 

Five Forces in knowledge firms

In an article in the Journal of Business Strategy ...
Usage (application): Knowledge-intensive Firms
 
 
 

Five Forces e-Banking

In an article in Services Marketing Quarterly (200...
Usage (application): Online Banking
 
 
 

The Role of Competitors in Strategy and Business Failures

Gilad (2014) researched in what way and to what ex...
Usage (application): Competitive Strategy, Competitive Environment, Competitive Intelligence, Industry Analysis
 
 

Resources - Five Forces (Porter) | Five Forces Analysis Premium

Five Forces overview

Porterís Five Forces Model of Industry - Structure...
Usage (application): Overview Presentation
 

Typologies and Strategies of Co-opetition

Presentation about Co-opetition thereby especially...
Usage (application): Co-opetition, Strategic Partnerships, Strategic Collaboration, Strategic Clusters
 

5 Forces Assessment

Industry Analysis: The Five Forces. By Cole Ehmke,...
Usage (application): 5 Forces Self-Assessment
 

How Businesses can Use Information Technology (IT) in Strategic Ways

This presentation looks at Information Technology ...
Usage (application): Strategic Management, Information Technology
 

7 Steps for Creating a Strategic Business Plan

Presentation about strategic planning and business...
Usage (application): Strategic Planning, Strategic Management, Business Planning, Business Plan
 

Interview Porter: How to Apply the Five Forces Framework?

Interview Michael E. Porter, Professor at Harvard ...
Usage (application): Applying the 5 Forces for Fundamental Industry Analysis
 

Interview Michael Porter: Getting Started with the 5 Forces and Involving Everybody

Interview Michael E. Porter, Professor at Harvard ...
Usage (application): Initial Understanding of Industry Analysis
 

Interview Porter: The Basic Notion of the Five Forces

Interview with Michael E. Porter, Professor at Har...
Usage (application): Initial understanding of the Five Competitive Forces
 
 

News about Five Forces


     
 

News about Business Strategy


     
 

Videos about Five Forces


     
 

Videos about Business Strategy


     
 

Presentations about Five Forces


     
 

Presentations about Business Strategy


     
 

More about Five Forces


     
 

More about Business Strategy


     

Compare with: Porter Competitive Advantage  |  Four Trajectories of Industry Change  |  Parenting Advantage  |  Core Competence  |  The Value Net, Co-opetition  |  Delta Model  |  Resource-Based View  |  BCG Matrix  |  Growth Phases  |  Distinctive Capabilities  |  Organizational Configurations  |  3C's  |  Porter Diamond Model  |  Bricks and Clicks  |  Twelve Principles of the Network Economy  |  Vertical Integration  |  Horizontal Integration


Return to Management Hub: Decision-making & Valuation  |   Finance & Investing  |  Marketing  |   Strategy  |  Supply Chain & Quality


More Management Methods, Models and Theory

Special Interest Group Leader

You here


About 12manage | Advertising | Link to us | Privacy | Terms of Service
Copyright 2017 12manage - The Executive Fast Track. V14.1 - Last updated: 21-10-2017. All names tm by their owners.