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PORTERS FIVE FORCE MODEL of 

INDUSTRY ANALYSIS

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Porter¶s 5 Forces Model

Allows the development of a competitive strategy

Suggests 5 main forces may be decisive in helping

shape the outcome: ± Suppliers

 ± New Entrants

 ± Substitutes

 ± Buyers

 ± Industrial competitors

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Threat of new entrants

New entrants bring increased capacity

to the industry

Example: low cost airlines

New entrants can be deterred by

barriers to entry

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Barriers to new entrants

Economies of scale Patents

Product differentiation

Capital requirements (financial & specialistequipment)

Skills

Access to distribution channels

Reaction/strategic decisions of incumbents(ex- all undercut new entrant)

Government policy (ex- de-regulation)

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The Bargaining Power of Suppliers

Suppliers exert power in the industry bythreatening to raise prices or reduce

quality

Powerful suppliers can squeeze industryprofitability if firms are unable to recovercost increases

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Suppliers - likely to be powerful if 

Supplier industry is dominated by a few firms

Suppliers products have few substitutes

Buyer is not an important customer tosupplier

Suppliers product is an important input to

buyers product Suppliers products have high switching costs

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The Bargaining Power of Buyers

Buyers compete with the supplying

industry by:

 ±Bargaining down prices

 ±Forcing higher quality

 ±Playing firms off of one another

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Buyer groups are likely to be powerful

if 

Buyers are concentrated

They purchase a significant fraction of the sellers

goods

Products are undifferentiated

Buyers face few switching costs

Buyers present a credible threat of backward

integration

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The Threat of Substitute products

Products with similar function limit the prices firms can charge

Keys to evaluating substitute products:

 ± Products with improving price/performance tradeoffs relative topresent industry products

Examples: Electric security system replaces a security guard

Fax machine replaces overnight delivery

Digital camera replaces the need for filmHandy Cam replaces need for digital camera

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The threat of substitute

products.....Questions

How many substitute products/services haveappeared in your industry in the last 5 years?

What are they? How different are they? Were they introduced by your organisation or

others?

Which organisation in your industry does themost Research and Development?

What happens to price, profits and market sharewhen substitutes are introduced?

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Rivalry among Existing

Competitors Intense rivalry often plays out in the

following ways:

 ±Price competition ±Advertising battles

 ± Increasing consumer warranties andservice

 ±New product roll-outsPrice competition often leaves the entire

industry worse off 

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Coca Cola

Traditional competition:

 ± Prices of Pepsi, local brands

 ± Market share

 ± Promotional actions of competition

New entrants:

 ± New look-a-like manufacturers

Substitute products:

 ± Fashionable new drinks, milk drinks, coffee, beer,

water, smoothies ...

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Coca-cola

Suppliers: ± Price and availability of ingredients on world market

 ± Quality, speed, safety, traceability, flexibility of supplychain

Buyers/consumers:

 ± High as a result of intense competition both amongbranded and unbranded products.

 ± Combined purchase power of shops, bars,supermarkets

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MARKET ANALYSIS

INDUSTRY ANALYSIS

- Porters 5 force theory  (Industry attractiveness)

Rivalry among

existing firms

Zen, Santro, Alto,WagonR, Palio,

Indica

Entry/ Exit barriers

High capital costs

No initial scale economics

Established player and image

Substitutes

H

onda, Toyota,Cheverlet, Ford,

Buyer

Latest international

design

More precision timed

ignition

Higher fuel efficiency

Engine power

Passenger safety

roominess

Supplier

Motor India

Goetze,

CEAT,Bridgestone,MRF, Modi, Engine

Valves,

Steering systems