ANALYZING INDUSTRY COMPETITION
Porter's Five Forces Model
A useful framework for analyzing an industries competitive structure is provided by
Michael Porter's "Five Forces of Competition Model". The model provides a framework
for classifying and analyzing the features of an industry that determine the intensity of
competition and the level of profitability in that industry. The model focuses on the
relationships and bargaing power between a company and its suppliers, buyers and
competitors. It also examines the potential threat from new entrants and subsitute
products or services. The bargaining power reflected in these 5 relationships determines
the competitive structure and profit potential of the industry. Of particular interest in
scenarios is to understand how the bargaining power of different actors changes across
sceanrios and over time. The relationships in the model are shown in the diagram below.
Structural Features Determining the Strength of Competitive Forces
A number of key features determine the strength of the five competitive forces. These are
listed below.
Threat of Entry (Barriers to Entry & Reaction of Existing Competitors)
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Economies of scale and economies of experience
Absolute cost advantage
Capital requirements
Product / service differentiation
Switching costs for customers to change supplier
Access to distribution channels
Government, legal or regulatory barriers
Degree of expected retaliation from existing competitors
Threat of Substitutes (Products and Services)
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Buyer propensity to buy substitute products or services
Relative price performance of substitutes
Quality of subsitute product or service
Switching costs
Bargaining Power of Buyers Or Suppliers (same factors)
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Percentage of total buyer companies costs (how important is product in buyers
cost structure?)
Product / service differentiation (more buyer power for commodities or
standard services)
Competition between buyers for resource (buyer has less power for scarce
resource)
Size and concentration of buyer group vs supplier group
Buyers switching costs
Buyers information (greater buyer power with full demand & price
information)
Threat of backward integration by buyer or forward integration by supplier
Intensity of Rivalry Among Existing Firms
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Diversity of competitors
Concentration (dominance by a few firms usually results in less intensive
rivalry)
Industry growth (slow growth increases rivalry)
Fixed costs (high fixed costs increases competition for market share)
Product / service differentiation (high rivalry for commodities or standard
services)
Strategic stakes (long term commitment to industry)
Exit barriers (high exit barriers discourage excess capacity from leaving)