www.niklasblanke.com
  • Home
    • Sources
    • Contact the Owner
  • Business Strategies/Frameworks
    • Industry development
    • Porters 5 forces
    • Alternative Growth Strategies
    • S-curve
    • The Experience Curve
    • BCG Matrix
    • GE-McKinsey Matrix
    • 4P
    • Blue Ocean Strategy
    • Lean>
      • Lean Manufacturing
      • Kaizen (lean)
      • Six Sigma (lean)
    • Price Strategy>
      • Power of Pricing
      • Price Elasticity
      • Customer Value and Value Map
      • Pocket Price Waterfall
  • Financial Models and Key performance indicators
    • Balance sheet
    • Profit and loss statement
    • Basic Financial KPIs
    • DuPont Model
    • Financial Benchmarks
  • Culture, values, behaviors
    • Impact>
      • Myers-Briggs
      • DISC Behavioral Model
    • Influence
    • Behavior
    • Hofstede - National Culture
  • Selected Business Books
    • Good To Great
    • The Art of Profitability
    • Crossing the Chasm
    • Long Tail
    • 7 habits of highly effective people
  • Recommended Videos
  • Interesting quotes

Porters 5 forces

Porters 5 Forces is model that can be used to evaluate the attractiveness of an industry and what strategy companies can us. The Attractiveness is evaluated by both measuring internal competition in the industry as well as the main external factors (Power of Buyers, Power of Suppliers, Threat of New Entrants, Threat of Substitutes). The higher the internal competitiveness, the power of suppliers and/or buyers, and the threat of new entrants and/or substitutes the less attractive an industry is (i.e. the return on invested capital is less likely to be significantly above long-term government securities adjusted upwards by the risk of capital loss).
Picture
Intensity of Rivalry among Existing Competitors

Rivalry among existing competitors in an industry takes the form of tactical activities to improve a firm’s position relative to competitors. This can take the form of price wars, Advertising battles, product introductions, customer service or warranties. A competitive move is in most cases countered by competition. If this pattern of action and reaction escalate then all firms in the industry may suffer and be worse off then before.

Some factors has a tendency to stimulate a higher rivalry within an industry: Numerous or Equally Balanced Competitors, Slow Industry Growth, High Fixed or Storage Costs, Lack of Differentiation of Switching Costs, Capacity Augmented in Large Increments, Diverse Competitors, High Strategic Stake, High Exit Barriers.
 
Bargaining Power of Buyers

Buyers constantly tries to force down the prices, bargaining for higher quality or more services, and playing competitors against each others – all at the expense of industry profitability. A buyer group is powerful if the following apply:

  • It is concentrated or purchasing large volumes relative to seller sales
  • The products it purchases from the industry represent a significant fraction of the buyer’s costs of purchases
  • The products it purchases from the industry are standard or undifferentiated
  • If faces few switching costs
  • It earns low profits
  • Buyers pose a credible threat of backward integration
  • The industry’s products is unimportant to the quality of the buyers’ products or services
  • The buyer has full information

Bargaining Power of Suppliers


Suppliers can effect an industry by threatening to raise prices of reduce quality of purchased goods and services. Powerful suppliers can thereby reduce profitability in an industry if unable to recover cost increases in its own prices. A supplier group is powerful if the following circumstances hold true:

  • It is dominated by a few companies and is more concentrated then the industry is sells to
  • It is not obliged to contend with other substitute products for sale to the industry
  • The industry is not an important customer of the supplier group
  • The suppliers’ product is an important input to the buyer’s business
  • The supplier group’s products are differentiated or it has built up switching costs
  • The supplier group poses a credible threat of forward integration

Threat of Substitute Products or Services


Substitute products limits the potential return of an industry by placing a ceiling in the prices firms in the industry can profitably charge. Substitute products that deserves the most attention are those that (1) are subject to trends improving their price-performance tradeoff with the industry’s products, (2) are produced by industries earning higher profits. In the latter case, substitutes often come rapidly into play if some development increases competition in their industry and causes price reductions or performance improvements.

Threat of New Entrants

New Entrants to an industry brings new capacity to the industry and a desire to gain market share. Prices can be reduced in order to gain market share resulting in lower profitability. The threat of entry into an industry depends on the barriers to entry that are present, coupled with the reaction from existing competitors. If barriers are high and/or the entrant can expect sharp retaliation from entrenched competitors, the threat of entry is low. There are 6 major sources of barriers to entry: Economics of Scale, Product Differentiation, Switching Costs, Access to distribution Channels, Cost Disadvantage Independent of Scale, Government Policy.
Source: Michael E. Porter, Competetive Strategy, 1998, New York (link to latest edition)
Powered by Create your own unique website with customizable templates.