Porter’s model of 5 competitive forces is
one of the most often
used business
Potential New Entrants
strategy tools
How easy or hard it is for new entrants to
start and compete? Any barriers to their
entry?
How strong is the rivalry among existing
players? Does only one player dominate?
Bargaining
Power of Suppliers
IntraIndustry Rivalry
Strategic Business
Unit
How strong is the position of the
suppliers? Are there many? Few?
Monopoly?
Source:
Michael E. Porter “Forces
Governing Competition in
Industry (Harvard Business
Review, Mar.-Apr. 1979)
Bargaining
Power of the
Buyers
How strong is the position
of the buyers? Can we sell
in large volumes? Do we
need to discount heavily?
Substitute Products
and Services
How easy or hard it is for
a new product or service to replace what already exists?
Porter’s Five
Competitive Forces
That Shape Strategy
www.youtube.com/watch?v=mYF2_FBCvXw
Porter’s Competitive Forces
http://www.bbc.co.uk/dna/h2g2/alabaster/A583120
Michael Porter on why
America needs an economic strategy
Generic Strategies and Industry Forces
Generic Strategies
Industry
Force
Cost
Leadership
Differentiation
Focus
Entry
Barriers
Ability to cut price in
retaliation deters potential
entrants.
Customer loyalty can
discourage potential
entrants.
Focusing develops core
competencies that can act
as an entry barrier.
Buyer
Power
Ability to offer lower price
to powerful buyers.
Large buyers have less
power to negotiate
because of few close
alternatives.
Large buyers have less
power to negotiate
because of few
alternatives.
Supplier
Power
Better insulated from
powerful suppliers.
Better able to pass on
supplier price increases to
customers.
Suppliers have power
because of low volumes,
but a differentiationfocused firm is better able
to pass on supplier price
increases.
Threat of
Substitutes
Can use low price to
defend against
substitutes.
Customer's become
attached to differentiating
attributes, reducing threat
of substitutes.
Specialized products &
core competency protect
against substitutes.
Better able to compete on
price.
Brand loyalty to keep
customers from rivals.
Rivals cannot meet
differentiation-focused
customer needs.
Rivalry
Applying the Porter Competitive Model
to Wal-Mart

Potential
New Entrants

Foreign General Merchandisers
or Discounters
Established Retailer Shifting
Strategy to Discounting or
Megastores
Intra-Industry Rivalry
Bargaining
Power
of Suppliers




U.S. Product Manufacturers
Foreign Manufacturers
Local Governments
I/T Product and Service
Suppliers
SBU: Wal-Mart
Rivals: Kmart, Target,
Toys R Us, Specialty Stores
Bargaining
Power of Buyers

Substitute
Products
and Services

 Mail Order
 Telemarketing
 Home Shopping Network  Buying Clubs
 Electronic Shopping
 Door-to-door Sales


Consumers in Small
Town U.S.A.
Consumers in the
Metropolitans Areas
in the U.S.
Canadian and
Mexican Consumers
Other Foreign
Consumers
Porter Competitive Model
Education Industry: U.S. Universities
Potential
New Entrants
Bargaining
Power
of Suppliers
 Faculty and Staff
 Equipment, Service,
Suppliers
 Alumni
 Foundations, Business
 Government
 Foreign Universities
 Distance Learning
 Motorola University
 Phoenix, DeVry, National
Intra-Industry Rivalry
Strategic Business Unit
Substitute
Products
and Services
 Books and Videotapes
 Computer-Based Training
 Training Companies
 Consulting Firms
Bargaining
Power of Buyers
 Students
 Parents
 Business
 Employers
 Legislators
Porter’s Model and the Role of the Government:


The government plays an important role in Porter’s diamond model.
Like everybody else, Porter argues that there are some things that
governments do that they shouldn't, and other things that they do not
do but should. He says, "Government’s proper role is as a catalyst and
challenger; it is to encourage - or even push - companies to raise their
aspirations and move to higher levels of competitive performance …"
Governments can influence all four of Porter’s determinants through a
variety of actions such as
–
–
–
–
–

Subsidies to firms, either directly (money) or indirectly (through
infrastructure).
Tax codes applicable to corporation, business or property ownership.
Educational policies that affect the skill level of workers.
They should focus on specialized factor creation. (How can they do this?)
They should enforce tough standards. (This prescription may seem
counterintuitive. What is his rationale? Maybe to establish high technical
and product standards including environmental regulations.)
The problem, of course, is through these actions, it becomes clear which
industries they are choosing to help innovate. What methods do they use to
choose? What happens if they pick the wrong industries?
Criticisms
 Although Porter theory is renowned, it has a number of critics.
 Porter developed this paper based on case studies and these
tend to only apply to developed economies.
 Porter argues that only outward-FDI is valuable in creating
competitive advantage, and inbound-FDI does not increase
domestic competition significantly because the domestic firms
lack the capability to defend their own markets and face a
process of market-share erosion and decline. However, there
seems to be little empirical evidence to support that claim.
 The Porter model does not adequately address the role of
MNCs. There seems to be ample evidence that the diamond is
influenced by factors outside the home country.