Porter’s Five Forces

Porter’s Five Forces

1. Benefits Porter’s Five Forces analysis

   • helps organisations to understand the factors affecting profitability in a specific industry, and can help to inform decisions relating to:
     • whether to enter a specific industry
     • whether to increase capacity in a specific industry
     • developing competitive strategies

2. Implementing Porter’s Five Forces analysis

   • Can we define our industry?
   • Do we understand which lifecycle stage the industry is in?
   • Do we understand how volatile our industry is?

3. ACTIONS TO TAKE/Dos

   • Use this model where there are at least three competitors in the market.
   • Consider the impact that government has or may have on the industry.
   • Consider the industry lifecycle stage – earlier stages will be more turbulent.
   • Consider the dynamic/changing characteristics of the industry.

4. ACTIONS TO AVOID/Don’ts

   • Avoid using the model for an individual firm; it is designed for use on an industry basis.

5. were developed in 1979 by Michael E Porter of Harvard Business School as a simple framework for assessing and evaluating the competitive strength and position of a business organisation.

6. The five forces are:

   • Supplier power
     • This is driven by the: number of suppliers of each essential input; uniqueness of their product or service; relative size and strength of the supplier; and cost of switching from one supplier to another.
   • Buyer power
     • This is driven by the: number of buyers in the market; importance of each individual buyer to the organisation; and cost to the buyer of switching from one supplier to another.
   • Competitive rivalry
     • The main driver is the number and capability of competitors in the market.
   • Threat of substitution
     • Where close substitute products exist in a market, it increases the likelihood of customers switching to alternatives in response to price increases. This reduces both the power of suppliers and the attractiveness of the market.
   • Threat of new entry
     • Profitable markets attract new entrants, which erodes profitability.