Porter's Five Forces

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Michael [[author::Porter]]'s 1979 framework uses concepts developed in IO economics to derive 5 forces that determine the attractiveness of a market. Porter referred to these forces as the microenvironment, to contrast it with the more general term macroenvironment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace.
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Michael Porter's 1979 framework uses concepts developed in IO economics to derive 5 forces that determine the attractiveness of a market. Porter referred to these forces as the microenvironment, to contrast it with the more general term macroenvironment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace.
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Four forces -- the bargaining power of customers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products -- combine with other variables to influence a fifth force, the level of competition in an industry. Each of these forces has several determinants:
 
Four forces -- the bargaining power of customers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products -- combine with other variables to influence a fifth force, the level of competition in an industry. Each of these forces has several determinants:
  
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[[File:porters5forces.jpg|Porter's Five Forces]]
  
  
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[img[test image|http://img367.imageshack.us/img367/2836/5forces4cb.jpg]]
 
  
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* The bargaining power of customers
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* The bargaining power of customers
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o buyer concentration to firm concentration ratio
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**buyer concentration to firm concentration ratio
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o bargaining leverage
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** bargaining leverage
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o buyer volume
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**buyer volume
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o buyer switching costs relative to firm switching costs
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**buyer switching costs relative to firm switching costs
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o buyer information availability
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**buyer information availability
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o ability to backward integrate
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**ability to backward integrate
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o availability of existing substitute products
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**availability of existing substitute products
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o buyer price sensitivity
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**buyer price sensitivity
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o price of total purchase
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**price of total purchase
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* The bargaining power of suppliers
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* The bargaining power of suppliers
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o supplier switching costs relative to firm switching costs
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**supplier switching costs relative to firm switching costs
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o degree of differentiation of inputs
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**degree of differentiation of inputs
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o presence of substitute inputs
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**presence of substitute inputs
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o supplier concentration to firm concentration ratio
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**supplier concentration to firm concentration ratio
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o threat of forward integration by suppliers relative to the threat of backward integration by firms
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**threat of forward integration by suppliers relative to the threat of backward integration by firms
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o cost of inputs relative to selling price of the product
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**cost of inputs relative to selling price of the product
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o importance of volume to supplier
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**importance of volume to supplier
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* The threat of new entrants
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* The threat of new entrants
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o the existence of barriers to entry
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**the existence of barriers to entry
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o economies of scale
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**economies of scale
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o proprietary product differences
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**proprietary product differences
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o brand equity
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**brand equity
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o switching costs
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**switching costs
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o capital requirements
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**capital requirements
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o access to distribution
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**access to distribution
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o absolute cost advantages
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**absolute cost advantages
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o learning curve advantages
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**learning curve advantages
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o expected retaliation
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**expected retaliation
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o government policies
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**government policies
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* The threat of substitute products
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*The threat of substitute products**
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o buyer propensity to substitute
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**buyer propensity to substitute
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o relative price performance of substitutes
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**relative price performance of substitutes
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o buyer switching costs
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**buyer switching costs
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o perceived level of product differentiation
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**perceived level of product differentiation
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* The intensity of competitive rivalry
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*The intensity of competitive rivalry
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o power of buyers
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**power of buyers
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o power of suppliers
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**power of suppliers
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o threat of new entrants
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**threat of new entrants
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o threat of substitute products
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**threat of substitute products
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o industrial growth
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**industrial growth
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o industry overcapacity
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**industry overcapacity
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o exit barriers
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**exit barriers
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o diversity of competitors
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**diversity of competitors
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o informational complexity and asymmetry
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**informational complexity and asymmetry
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o brand equity
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**brand equity
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o fixed cost allocation per value added
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**fixed cost allocation per value added
  
 
This 5 forces analysis is just one part of the complete Porter strategic system. The other elements are strategic groups (also called strategic sets), the value chain, the generic strategies of cost leadership, differentiation, and focus, and the market positioning strategies of value based, needs based, and access based market positions.
 
This 5 forces analysis is just one part of the complete Porter strategic system. The other elements are strategic groups (also called strategic sets), the value chain, the generic strategies of cost leadership, differentiation, and focus, and the market positioning strategies of value based, needs based, and access based market positions.
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Contents
 
Contents
 
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See also [[Porter's Value Chain]], [[Porter]]
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See also [[Porter's Value Chain]], [[author::Porter]]
  
 
[[Category:Strategy]]
 
[[Category:Strategy]]

Latest revision as of 21:42, 27 September 2012

Michael Porter's 1979 framework uses concepts developed in IO economics to derive 5 forces that determine the attractiveness of a market. Porter referred to these forces as the microenvironment, to contrast it with the more general term macroenvironment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace.

Four forces -- the bargaining power of customers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products -- combine with other variables to influence a fifth force, the level of competition in an industry. Each of these forces has several determinants:

Porter's Five Forces


  • The bargaining power of customers
    • buyer concentration to firm concentration ratio
    • bargaining leverage
    • buyer volume
    • buyer switching costs relative to firm switching costs
    • buyer information availability
    • ability to backward integrate
    • availability of existing substitute products
    • buyer price sensitivity
    • price of total purchase
  • The bargaining power of suppliers
    • supplier switching costs relative to firm switching costs
    • degree of differentiation of inputs
    • presence of substitute inputs
    • supplier concentration to firm concentration ratio
    • threat of forward integration by suppliers relative to the threat of backward integration by firms
    • cost of inputs relative to selling price of the product
    • importance of volume to supplier
  • The threat of new entrants
    • the existence of barriers to entry
    • economies of scale
    • proprietary product differences
    • brand equity
    • switching costs
    • capital requirements
    • access to distribution
    • absolute cost advantages
    • learning curve advantages
    • expected retaliation
    • government policies
  • The threat of substitute products**
    • buyer propensity to substitute
    • relative price performance of substitutes
    • buyer switching costs
    • perceived level of product differentiation
  • The intensity of competitive rivalry
    • power of buyers
    • power of suppliers
    • threat of new entrants
    • threat of substitute products
    • industrial growth
    • industry overcapacity
    • exit barriers
    • diversity of competitors
    • informational complexity and asymmetry
    • brand equity
    • fixed cost allocation per value added

This 5 forces analysis is just one part of the complete Porter strategic system. The other elements are strategic groups (also called strategic sets), the value chain, the generic strategies of cost leadership, differentiation, and focus, and the market positioning strategies of value based, needs based, and access based market positions.

Contents [hide] 

* 1 Criticism and Extensions
* 2 See also
* 3 References
* 4 External links

[edit]

Criticism and Extensions

Porter's framework has repeatedly been challenged by other academics and strategists. Kevin Coyne and Somu Subramaniam have stated that three dubious assumptions underlie the five forces: that buyers, competitors, and suppliers are unrelated and do not interact and collude; that the source of value is structural advantage (creating barriers to entry); and that uncertainty is low, allowing participants in a market to plan for others behavior. An important extension to Porter was found in the work of Brandenburger and Nalebuff in the mid-1990s. Using Game theory, they added the concept of complementors, helping to explain the reasoning behind strategic alliances. [edit]

See also 

* Porter generic strategies
* marketing
* strategic management
* industry or market research
* competitor analysis
* value chain
* Porter hypothesis

[edit]

References 

* Porter, M. (1979) "How competitive forces shape strategy", Harvard Business Review, March/April 1979.
* Porter, M. (1980) Competitive Strategy, The Free Press, New York, 1980.

[edit]

External links 

* Porter's Five Forces
* Porter's Five Competitive forces
* Porters Five Forces - Management Models - Management Portal


See also Porter's Value Chain, Porter

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