The Five Forces Framework (Porter)

The Five Forces Framework (Porter)

1. Way of assessing the attractiveness of different industries; which to enter and to exit

2. 5 Forces

   • Threat of Substitutes
     • Can reduce demand + thus attractiveness
   • Power of Suppliers
     • Supplier power is likely to b high when;
       • Concentrated suppliers
       • High switching costs
       • Supplier competition threat
   • Power of Buyers
     • Organisation's immediate customers i.e. no necessarily the ultimate consumer)
       • E.g. Nestle / Unilever's buyers are retailers e.g. Tesco - not the ordinary consumer = Tesco is more powerful
     • The buying power is likely to be high when;
       • Concentrated buyers e.g. Milk (few retailers dominate the market + buyers are likely to shop around for best price)
       • Low switching costs
       • Buyer competition threat (threat of doing supplier's job themselves through backward vertical integration)
   • Extent of Rivalry
     • Organisations with similar products + services aimed at the same customer group
       • Air France & BA are competitive rivals - trains are substitutes
     • Factors affecting the degree of competitive rivalry;
       • Competitor balance (size)
       • Industry growth rate
         • (a) strong growth = organisations can grow with market
         • (b) low growth = growth will be at expense of rival and will thus be met with fierce competition
           • Low growth markets are associated with price competition
       • High fixed costs
       • Low differentiation = low customer loyalty + low switching costs
   • Threat of Entry
     • Scale + experience (high investment requirements for entry, experience curve effects)
     • Access to supply + distribution channels
     • Expected retaliation (price wars)

3. Key Issues

   • Defining the 'right' industry
     • Most industries can be analysed at different levels e.g. airline industry has many different segments with different customer groups
   • Converging industries
     • Begin to overlap in technologies - industry boundaries are continuously changing
   • Complementary products
     • Are customers prepared to pay for products / services if they are bundled?

4. Dynamics of Industry Structure

   • Competitive forces change overtime
   • 3 additional approaches to understanding change in industry structure
     • (1) industry life cycle, (2) hypercompetition, (3) 5 forces
       • (1) Industry life cycle
         • Development, Growth, Shake-out, Maturity, Decline