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Session 14-Porter 5 Forces Model

Porter's Five Forces model analyzes five competitive forces that determine the profitability and attractiveness of an industry. The forces include the threat of new entrants, bargaining power of suppliers and buyers, threat of substitute products, and rivalry among existing competitors. The model is a useful tool for analyzing industry competition and developing strategic advantages through either cost leadership or differentiation. While powerful, it does not account for internal strengths or dynamic changes in the business environment.

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Rachmatya Pratami
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98 views

Session 14-Porter 5 Forces Model

Porter's Five Forces model analyzes five competitive forces that determine the profitability and attractiveness of an industry. The forces include the threat of new entrants, bargaining power of suppliers and buyers, threat of substitute products, and rivalry among existing competitors. The model is a useful tool for analyzing industry competition and developing strategic advantages through either cost leadership or differentiation. While powerful, it does not account for internal strengths or dynamic changes in the business environment.

Uploaded by

Rachmatya Pratami
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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PORTER’s FIVE FORCEs MODEL

INTRODUCTION
• 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.

• It captures the key elements of industry competition.


MICHAEL PORTER

“An industry’s profit potential is largely


determined by the intensity of competitive
rivalry within that industry”
 The model of the Five Competitive Forces was
developed by Michael E. Porter

 An important tool for analyzing an organizations industry


structure in strategic processes.

 These forces determine the intensity of competition and


hence the profitability and attractiveness of an industry
 impact on a company’s ability to compete in a given
market.
Porter’s 5 Forces Model
Source: Micheal E.Porter, Competitive Strategy (New York: The Tree Press, 1980)

5
Five Forces Driving Industry Competition
PORTER’s FIVE FORCEs MODEL
Threat of New Entrants
Economies of Scale

Barriers to Product Differentiation


Entry
Capital Requirements

Customer Switching Costs

Access to Distribution Channels

Government Policy

Expected Retaliation
PORTER’s FIVE FORCEs MODEL

Bargaining
Power of
Suppliers
Bargaining Power of Suppliers

Suppliers are likely to be powerful if:


Suppliers exert
power in the Supplier industry is dominated by a few
industry by: firms
* Threatening to raise Suppliers’ products have few substitutes
prices or to reduce
Buyer is not an important customer to
quality supplier
Powerful suppliers
can squeeze Suppliers’ product is an important input to
buyers’ product
industry
profitability if firms Suppliers’ products are differentiated
are unable to
Suppliers’ products have high switching
recover cost
costs
increases
PORTER’s FIVE FORCEs MODEL
Threat of
ThreNaetwofNew
EEnntrtarnatnsts

Bargaining Bargaining
Power of Power of
Suppliers Buyers
Bargaining Power of Buyers

Buyer groups are likely to be powerful if:


Buyers compete with
Buyers are concentrated
the supplying industry
Purchase accounts for a significant fraction of by:
supplier’s sales

Products are undifferentiated * Bargaining down prices


Buyers face few switching costs * Forcing higher quality
Buyer presents a credible threat of backward * Playing firms off of
integration
each other
Buyer has full information
PORTER’s FIVE FORCEs MODEL

Threat of
Substitute
Products
Threat of Substitute Products

Keys to evaluate substitute products:


Products with improving
price/performance tradeoffs
Products with relative to present industry
similar products
function limit
the prices
firms can Example:
charge
Electronic security systems in place
of security guards

Fax machines in place of overnight


mail delivery
PORTER’s FIVE FORCEs MODEL

Rivalry Among
Competing Firms in
Industry
Rivalry Among Existing Competitors

Intense rivalry often plays out in the following


ways:
Using price competition
Staging advertising battles
Increasing consumer warranties or service
Making new product introductions

Occurs when a firm is pressured or sees an


opportunity
Price competition often leaves the entire industry worse off

Advertising battles may increase total industry demand, but may


be costly to smaller competitors
Coca-cola
• Traditional competition:
 Prices of Pepsi, local brands
 Market share
 Promotional actions of competition

• New entrants:
 New “look-a-like” manufacturers

• Substitute products:
 Fashionable new drinks, milk drinks, coffee, beer, ...
Competitive Advantage
• The Competitive Advantage model of Porter learns that
competitive strategy is about taking offensive or defensive
action to create a defendable position in an industry, in order
to cope successfully with competitive forces.

• Companies can combat the pressure of the five forces and


create competitive advantages.

• There are 2 basics types of Competitive Advantage :


 Cost leadership (low cost)
 Differentiation
Strengths of five forces
model:
 The model is strong tool for competitive analysis at
industry level.

 It provides useful input for performing a SWOT


analysis.
Limitations
• Inside-out strategy is ignored (core competence)

• It does not cope with synergies and interdependencies


within the portfolio of large corporations (parenting
advantage)

• The environments which are characterized by rapid,


systemic and radical change require more flexible, dynamic
or emergent approaches to strategy formulation (disruptive
innovation)

• Sometimes it may be possible to create completely new


markets instead of selecting from existing ones (blue ocean
strategy)
Thank you

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