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Nicole Fiamingo

Five Forces Industry Analysis
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Developed by Michael Porter
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Provides an understanding of an industry and its participants
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Used as a means to decrease the gap between a firm’s external environment and its internal resources
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Five Forces Industry Analysis
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Identify the profit potential of an industry
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Identify the forces that would harm your company’s profitability in that industry
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Protect and extend your competitive advantage
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Anticipate changes in industry structure
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Five Forces Industry Analysis
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Threat of new entrants
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute products or services
Degree of rivalry among existing competitors
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Five Forces Industry Analysis
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New entrants usually face several barriers to entry, including:
Entry-deterring price
Incumbent retaliation
High entry costs
Experience effects
Other cost advantages
Product differentiation
Distribution access
Government restrictions
Switching costs
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Easy to Enter if there is:
• Common technology
• Little brand franchise
• Access to distribution channels
• Low scale threshold
Difficult to Enter if there is:
• Patented or proprietary know-how
• Difficulty in brand switching
• Restricted distribution channels
• High scale threshold
Easy to Exit if there are:
• Salable assets
• Low exit costs
• Independent businesses
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Difficult to Exit if there are:
• Specialized assets
• High exit costs
• Interrelated businesses

Five Forces Industry Analysis
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Concentration
Diversification
Switching costs
Organization
Government
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Suppliers are Powerful if:
Credible forward integration threat by suppliers
Suppliers concentrated
Significant cost to switch suppliers
Customers Powerful
Suppliers are Weak if:
Purchase commodity products
Concentrated purchasers
Customers Weak
Example
Baxter International, manufacturer of hospital supplies, acquired American
Hospital Supply, a distributor
Drug industry's relationship to hospitals
Microsoft's relationship with PC manufacturers
Boycott of grocery stores selling nonunion picked grapes
Example
Grocery store brand label products
Garment industry relationship to major department stores
Travel agents' relationship to airlines http://www.quickmba.com/strategy/porter.shtml
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Five Forces Industry Analysis
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Differentiation
Concentration
Profitability
Quality
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Buyers are Powerful if: Example
Buyers are concentrated - there are a few buyers with significant market share
Buyers purchase a significant proportion of output - distribution of purchases or if the product is standardized
Buyers possess a credible backward integration threat - can threaten to buy producing firm or rival
Buyers are Weak if:
Producers threaten forward integration producer can take over own distribution/retailing
Buyers are fragmented (many, different) no buyer has any particular influence on product or price
Producers supply critical portions of buyers' input - distribution of purchases
DOD purchases from defense contractors
Best Buy and Sears' large retail market provides power over appliance manufacturers
Large auto manufacturers' purchases of tires
Example
Movie-producing companies have integrated forward to acquire theaters
Most consumer products
Intel's relationship with PC manufacturers http://www.quickmba.com/strategy/porter.shtml
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Five Forces Industry Analysis
4. Threat of Substitute Products or Services
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Relative price/performance trade off
Switching costs
Profitability
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The Threat of Substitutes is High Risk: The Threat of Substitutes Low Risk:
Consumer switching costs are low
Substitute product is cheaper than industry product
Consumer switching costs are high
Substitute product is more expensive than industry product
Substitute product quality is equal or superior to industry product quality
Substitute product quality is inferior to industry product quality
Substitute performance is equal or superior to industry product performance
Substitute performance is inferior to industry product performance
No substitute product is available http://www.wikicfo.com/Wiki/default.aspx?Page=Threat+of+Substitutes+-
+one+of+Porters+Five+Forces&AspxAutoDetectCookieSupport=1
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5. The Degree of Rivalry Among Existing Players
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Market Growth
Cost Structure
Barriers to exit
Product switching
Diversity
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Rivalry will be high:
There are a large number of similar sized firms (rather than a few dominant firms) all competing with each other for customers
The costs of leaving the industry are high e.g. because of high levels of investment. This means that existing firms will fight hard to survive because they cannot easily transfer their resources elsewhere
The level of capacity utilization. If there are high levels of capacity being under-utilized the existing firms will be very competitive to try and win sales to boost their own demand
The market is shrinking so firms are fighting for their share of falling sales
There is little brand loyalty so customer are likely to switch easily between products http://www.oup.com/uk/orc/bin/9780199296378/01student/additional/page_11.htm
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Five Forces Industry Analysis
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Forecast future changes in each of the five forces
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Discover how these changes will affect the other forces
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Discover how the interrelated changes will affect the future profitability of the industry
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Discover how you might change the strategy to exploit the changing industry structure
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Five Forces Industry Analysis
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Underestimates the capabilities that may serve as the company’s competitive advantage in the long-term
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Does not take into account the synergies and interdependence within a corporation’s overall portfolio
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Strict interpretations ignore social & political factors
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Does not address why or how companies are able to get advantageous positions
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Five Forces Industry Analysis
Step 1: Collect Information
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Identify your industry
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Look at existing demand & supply patterns
Identify the characteristics of each of the five forces
Examine & assess their impact on the industry
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Five Forces Industry Analysis
Main Sources of Competitive Pressures
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Rivalry among competitors
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Threat of substitute products
Threat of potential entry
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Bargaining power of suppliers
Bargaining power of buyers
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Five Forces Industry Analysis
Step 2: Assess & Evaluate
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Determine the direction of the force
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Give each force a value indicating if it is strong, moderate, or weak.
Scale of 1 – 5, with 1 being the weakest
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The ultimate goal:
To identify the ability of your company to successfully compete within its industry, of the five forces given the collective strength
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Five Forces Industry Analysis
Step 3: Develop Strategy
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Repeat the first two steps in light of industry change and evolution
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Long-term industry trends should be analyzed to determine whether the profitability of the industry is sustainable and how this will affect your company’s competitive position.
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Five Forces Industry Analysis
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Understanding how an industry will evolve provides important direction for selecting and managing strategy around these five criteria
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Not all industries are alike-for companies with product portfolios across numerous industries, this technique should be repeated for each industry
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