Strategy consultants occasionally use Porter's five forces framework when making a qualitative evaluation of a firm's strategic position. However, for most consultants, the framework is only a starting point or "checklist" they might use. Like all general frameworks, an analysis that uses it to the exclusion of specifics about a particular situation is considered naive.
Porter's five force include three forces from 'horizontal' competition: threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers and the bargaining power of customers.
According to Porter, the five forces model should be used at the industry level; it is not designed to be used at the industry group or industry sector level. An industry is defined at a lower, more basic level: a market in which similar or closely related products and/or services are sold to buyers. A firm that competes in a single industry should develop, at a minimum, one five forces analysis for its industry. Porter makes clear that for diversified companies, the first fundamental issue in corporate strategy is the selection of industries (lines of business) in which the company should compete; and each line of business should develop its own, industry-specific, five forces analysis. The average Global 1,000 company competes in approximately 52 industries (lines of business).
This five forces analysis is just one part of the complete Porter strategic models.
• 1 The Five Forces
o The threat of substitute products
o The threat of the entry of new competitors
o The intensity of competitive rivalry
o The bargaining power of customers
o The bargaining power of suppliers
• 2 Criticisms of the 5 Forces model
• 3 See also
• 4 References
The Five Forces
The threat of substitute products
The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives:
• Buyer propensity to substitute
• Relative price performance of substitutes
• Buyer switching costs
• Perceived level of product differentiation
The threat of the entry of new competitors
Profitable markets that yield high returns will draw firms. This results in many new entrants, which will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level (perfect competition).
• The existence of barriers to entry (patents, rights, etc.)
• Economies of product differences
• Brand equity
• Switching costs or sunk costs
• Capital requirements
• Access to distribution
• Customer loyalty to established brands
• Absolute cost advantages
• Learning curve advantages
• Expected retaliation by incumbents
• Government policies
The intensity of competitive rivalry
For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry.
• Sustainable competitive advantage through improvisation
The bargaining power of customers
The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes.
• Buyer concentration to firm concentration ratio
• Degree of dependency upon existing channels of distribution
• Bargaining leverage, particularly in industries with high fixed costs
• Buyer volume
• Buyer switching costs relative to firm switching costs
• Buyer information availability
• Ability to backward integrate
• Availability of existing substitute products
• Buyer price sensitivity
• Differential advantage (uniqueness) of industry products
• RFM Analysis
The bargaining power of suppliers
The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or, e.g., charge excessively high prices for unique resources.
• Supplier switching costs relative to firm switching costs
• Degree of differentiation of inputs
• Presence of substitute inputs
• Supplier concentration to firm concentration ratio
• Employee solidarity (e.g., labor unions)
Criticisms of the 5 Forces model
Porter's framework has been challenged by other academics and strategists such as Stewart Neill. Similarly, the likes of Kevin P. Coyne and Some Subramanian have stated that three dubious assumptions underlie the five forces:
• That buyers, competitors, and suppliers are unrelated and do not interact and collude.
• That the source of value is structural advantage (creating barriers to entry).
• That uncertainty is low, allowing participants in a market to plan for and respond to competitive behavior.
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