Five Forces – Industry Analysis- COMPETITIVE STRATEGY
Michael Porter’s five forces framework is useful for competitive analysis because industry structure plays a major role in shaping competitive strategies. It is especially useful for those businesses with the following characteristics:
Mature and stable industry structure, where the analysis depends on a certain amount of predictability.
Emphasis on tangibles, with physical capital central to value creation.
According to Porter, the five forces collectively determine an industry’s potential for value creation. The five forces are:
Barriers to entry – It determines how difficult it is for a new competitor to enter an industry. The barriers could include a) the level of capital needed to enter an industry, b) the strength of established brands, c) access to distribution channels, d) economies of scale, and e) switching costs and government regulations, amongst other factors.
Substitution threat – It is contextual on the existence of substitute products and the likelihood that the potential buyer will switch to a substitute product, which typically acts as a dampener to pricing power.
Buyer Power – It is the bargaining strength of the buyers of a product or a service. It is dependent on a) buyer concentration, b) switching costs, c) level of information, and d) substitute products, amongst other factors.
Supplier Power – It is the amount of leverage that a supplier has with its customers in areas like price, quality and service.-Five
Firm Rivalry – It gauges how fiercely companies compete with one another in areas like price, service, warranties, new-product introductions and advertising. An intense degree of competitive pressure can make an industry unattractive for all participating companies. The factors that determine competitive rivalry are 1) industry growth, 2) the relative size of pre-production costs, and 3) the level of product differentiation.