3.2 Industry Analysis: Porter's Five Forces

Porter's Five Forces framework is a powerful tool for analyzing industry competition. It examines five key factors that shape a market: buyer power, supplier power, new entrants, substitutes, and rivalry among competitors.

By assessing these forces, companies can gauge industry attractiveness and profitability. This analysis helps firms develop strategies to gain competitive advantage, whether through differentiation, cost leadership, or other approaches tailored to the specific market dynamics.

Understanding Porter's Five Forces Framework

Porter's five competitive forces

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• Porter's Five Forces is a framework for analyzing the competitive environment and attractiveness of an industry developed by Michael E. Porter in 1979
• The five forces collectively determine the ultimate profit potential and attractiveness of an industry (automobiles, telecommunications)
  1. Bargaining power of buyers
  2. Bargaining power of suppliers
  3. Threat of new entrants
  4. Threat of substitute products or services
  5. Rivalry among existing competitors

Bargaining power in industries

• Bargaining power of buyers refers to the ability of customers to put the firm under pressure and affect its profitability (Walmart, Amazon)
  • Factors influencing buyer power include the number of buyers relative to suppliers, product differentiation, switching costs, buyer's ability to backward integrate, and price sensitivity of buyers
• Bargaining power of suppliers refers to the ability of suppliers to put the firm under pressure and affect its profitability (Intel, Qualcomm)
  • Factors influencing supplier power include the number of suppliers relative to buyers, uniqueness of supplied products or services, switching costs, supplier's ability to forward integrate, and importance of the industry to the supplier group

Threats to market position

• Threat of new entrants refers to the ease with which new competitors can enter the industry (ride-sharing, e-commerce)
  • Factors influencing the threat of new entrants include barriers to entry (economies of scale, capital requirements, government policies), expected retaliation from existing firms, access to distribution channels, and customer loyalty to established brands
• Threat of substitute products or services refers to the availability of alternative products or services that can satisfy similar customer needs (streaming services, plant-based meat)
  • Factors influencing the threat of substitutes include the relative price and performance of substitutes, switching costs for buyers, and buyer propensity to substitute

Intensity of industry rivalry

• Rivalry among existing competitors refers to the degree of competition among firms already operating within the industry (smartphones, airlines)
  • Factors influencing the intensity of rivalry include the number and size of competitors, industry growth rate, product differentiation, fixed costs and exit barriers, capacity increments, and diversity of competitors

Applying Porter's Five Forces

Industry attractiveness assessment

• Conduct a thorough analysis of each force within the industry to assess the strength and impact of each force on the industry's profitability
• Determine the overall attractiveness of the industry based on the collective impact of the five forces
  • An attractive industry has low bargaining power of buyers and suppliers, high barriers to entry for new entrants, few or less threatening substitutes, and moderate rivalry among existing competitors (consumer packaged goods, pharmaceuticals)
• Use the insights gained from the analysis to develop strategies that align with the competitive environment
  • Exploit opportunities and mitigate threats identified through the five forces analysis
  • Position the firm to achieve a sustainable competitive advantage within the industry (differentiation, cost leadership)