Porter’s Five Forces Industry Analysis
1
Industry analysis
• The profitability of any industry depends upon five environmental factors
• The five forces
– The threat of entry – The threat of substitution – The power of the buyers – The power of the suppliers – Competitive rivalry within the industry
– Eg pharmaceuticals
8
The Structural Determinants of Competition
THREAT OF ENTRY
•Capital requirements •Economies of scale •Absolute cost advantage •Product differentiation •Access to distribution channels •Legal/ regulatory barriers •Retaliation
– Eg fragmented horticulture industry faces concentrated, expert buyers with low switching costs
6
Power of suppliers
• Ability of suppliers to dictate the terms and conditions of supply
– eg aluminium industry faces threat from glass, plastics, steel
• These substitute products place a cap upon industry prices above which buyers will desert
Threat of SUBSTITUTES
substitutes
Bargaining power of buyers
BUYERS
3
The threat of entry
• Threat that new entrants will start up, increase capacity and competition and erode profits
5
Power of buyers
• Power of industry’s buyers to secure discounts or negotiate added value to products
• Depends on buyer concentration, information, switching costs
– Especially the degree of price competition
• Some industries are very price competitive
– Eg airlines
• Others are non price competitive and highly differentiated in products
– Supply concentration and differentiation is key
• Eg operating system component of PC • Eg the transmission system in bicycles
7
Competitive Rivalry
• The degree of competition within the industry for market share
• Deregulated
• Low start up costs
• Modest economies of scale
9
Examples of industry analysis
• Airlines • Pharmaceuticals • Professional football • Road Recovery Services
10
Airlines
• The threat of entry
– Very high because
• Depends on the size of the entry barriers
• Eg scale echreat of substitution
• Threat other industries will take business away:
BUYER POWER
• Buyers’ price sensitivity • Relative bargaining
power
SUBSTITUTE COMPETITION
• Buyers’ propensity to substitute
• Relative prices & performance of substitutes
SUPPLIER POWER
• Buyers’ price sensitivity • Relative bargaining
power
INDUSTRY RIVALRY
•Concentration •Diversity of competitors •Product differentiation •Excess capacity & exit barriers •Cost conditions
2
Porter’s Five Forces of Competition Framework
SUPPLIERS
Bargaining power of suppliers
POTENTIAL ENTRANTS
Threat of
new entrants
INDUSTRY COMPETITORS
Rivalry among existing firms