Porter's five forces analysis - Wikipedia

Porter's five forces include three forces from 'horizontal competition' – the threat of substitute products or services, the threat of established rivals, and ... Porter'sfiveforcesanalysis FromWikipedia,thefreeencyclopedia Jumptonavigation Jumptosearch Frameworktoanalyselevelofcompetitionwithinanindustry AgraphicalrepresentationofPorter'sfiveforces Porter'sFiveForcesFrameworkisamethodofanalysingtheoperatingenvironmentofacompetitionofabusiness.Itdrawsfromindustrialorganization(IO)economicstoderivefiveforcesthatdeterminethecompetitiveintensityand,therefore,theattractiveness(orlackthereof)ofanindustryintermsofitsprofitability.An"unattractive"industryisoneinwhichtheeffectofthesefiveforcesreducesoverallprofitability.Themostunattractiveindustrywouldbeoneapproaching"purecompetition",inwhichavailableprofitsforallfirmsaredriventonormalprofitlevels.Thefive-forcesperspectiveisassociatedwithitsoriginator,MichaelE.PorterofHarvardUniversity.ThisframeworkwasfirstpublishedinHarvardBusinessReviewin1979.[1] Porterreferstotheseforcesasthemicroenvironment,tocontrastitwiththemoregeneraltermmacroenvironment.Theyconsistofthoseforcesclosetoacompanythataffectitsabilitytoserveitscustomersandmakeaprofit.Achangeinanyoftheforcesnormallyrequiresabusinessunittore-assessthemarketplacegiventheoverallchangeinindustryinformation.Theoverallindustryattractivenessdoesnotimplythateveryfirmintheindustrywillreturnthesameprofitability.Firmsareabletoapplytheircorecompetencies,businessmodelornetworktoachieveaprofitabovetheindustryaverage.Aclearexampleofthisistheairlineindustry.Asanindustry,profitabilityislowbecausetheindustry'sunderlyingstructureofhighfixedcostsandlowvariablecostsaffordenormouslatitudeinthepriceofairlinetravel.Airlinestendtocompeteoncost,andthatdrivesdowntheprofitabilityofindividualcarriersaswellastheindustryitselfbecauseitsimplifiesthedecisionbyacustomertobuyornotbuyaticket.Afewcarriers–RichardBranson'sVirginAtlantic[citationneeded]isone–havetried,withlimitedsuccess,tousesourcesofdifferentiationinordertoincreaseprofitability. Porter'sfiveforcesincludethreeforcesfrom'horizontalcompetition'–thethreatofsubstituteproductsorservices,thethreatofestablishedrivals,andthethreatofnewentrants–andtwoothersfrom'vertical'competition–thebargainingpowerofsuppliersandthebargainingpowerofcustomers. Porterdevelopedhisfiveforcesframeworkinreactiontothethen-popularSWOTanalysis,whichhefoundbothlackinginrigorandadhoc.[2]Porter'sfive-forcesframeworkisbasedonthestructure–conduct–performanceparadigminindustrialorganizationaleconomics.OtherPorterstrategytoolsincludethevaluechainandgenericcompetitivestrategies. Contents 1Fiveforcesthatshapecompetition 1.1Threatofnewentrants 1.2Threatofsubstitutes 1.3Bargainingpowerofcustomers 1.4Bargainingpowerofsuppliers 1.5Competitiverivalry 2Factors,notforces 2.1Industrygrowthrate 2.2Technologyandinnovation 2.3Government 2.4Complementaryproductsandservices 3Usage 4Criticisms 5Seealso 6References 7Furtherreading Fiveforcesthatshapecompetition[edit] PartofaseriesonStrategy Majordimensions Strategy •Strategicmanagement Militarystrategy Strategicplanning •Gametheory Strategicstudies •Strategicthinking Majorthinkers MichaelPorter •RitaGuntherMcGrath BruceHenderson •GaryHamel CandaceA.Yano •C.K.Prahalad JimCollins •LiddellHart CarlvonClausewitz •SunTzu JulianCorbett •AlfredThayerMahan J.C.Wylie •AdrianSlywotzky SharonOster •ChrisZook HenryMintzberg •ClayChristensen Concepts Businessmodel •Competitiveadvantage Valuechain •Performanceeffects Corecompetency •Genericstrategies Frameworksandtools SWOT •Fiveforces Balancedscorecard •Ansoffmatrix OGSM •Managerialgridmodel PESTanalysis •Growth–sharematrix STP •MECEprinciple vte Threatofnewentrants[edit] Newentrantsputpressureoncurrentorganizationswithinanindustrythroughtheirdesiretogainmarketshare.Thisinturnputspressureonprices,costs,andtherateofinvestmentneededtosustainabusinesswithintheindustry.Thethreatofnewentrantsisparticularlyintenseiftheyarediversifyingfromanothermarketastheycanleverageexistingexpertise,cashflow,andbrandidentityasitputsastrainonexistingcompanies' profitability. Barrierstoentryrestrictthethreatofnewentrants.Ifthebarriersarehigh,thethreatofnewentrantsisreducedandconverselyifthebarriersarelow,theriskofnewcompaniesventuringintoagivenmarketishigh.Barrierstoentryareadvantagesthatexisting,establishedcompanieshaveovernewentrants.[3][4] MichaelE.Porterdifferentiatestwofactorswhichcanhaveaneffectonhowmuchofathreatnewentrantsmaypose:[5] Barrierstoentry Themostattractivesegmentisoneinwhichentrybarriersarehighandexitbarriersarelow.Itisworthnoting,however,thathighbarrierstoentryalmostalwaysmakeexitmoredifficult. MichaelE.Porterlists7majorsourcesofentrybarriers: Supply-sideeconomiesofscale–spreadingthefixedcostsoveralargervolumeofunitsthusreducingthecostperunit.Thiscandiscourageanewentrantbecausetheyeitherhavetostarttradingatasmallervolumeofunitandacceptapricedisadvantageoverlargercompanies,orriskcomingintothemarketonalargescaleinanattempttodisplacetheexistingmarketleader. Demand-sidebenefitsofscale–thisoccurswhenabuyer'swillingnesstopurchaseaparticularproductorserviceincreaseswithotherpeople'swillingnesstopurchaseit.Alsoknownasnetworkeffect,peopletendtovaluebeingina'network'withalargernumberofpeoplewhousethesamecompany. Customerswitchingcosts–Thesearewellillustratedbystructuralmarketcharacteristicssuchassupplychainintegrationbutalsocanbecreatedbyfirms.Airlinefrequentflyerprogramsareanexample. Capitalrequirements–clearlytheInternethasinfluencedthisfactordramatically.Websitesandappscanbelaunchedcheaplyandeasilyasopposedtothebrick-and-mortarindustriesofthepast. Incumbencyadvantagesindependentofsize(e.g.,customerloyaltyandbrandequity). Unequalaccesstodistributionchannels–iftherearealimitednumberofdistributionchannelsforacertainproduct/service,newentrantsmaystruggletofindaretailorwholesalechanneltosellthroughasexistingcompetitorswillhaveaclaimonthem. Governmentpolicysuchassanctionedmonopolies,legalfranchiserequirements,patents,andregulatoryrequirements. Expectedretaliation Forexample,aspecificcharacteristicofoligopolymarketsisthatpricesgenerallysettleatanequilibriumbecauseanypricerisesorcutsareeasilymatchedbythecompetition. Threatofsubstitutes[edit] Asubstituteproductusesadifferenttechnologytotrytosolvethesameeconomicneed.Examplesofsubstitutesaremeat,poultry,andfish;landlinesandcellulartelephones;airlines,automobiles,trains,andships;beerandwine;andsoon.Forexample,tapwaterisasubstituteforCoke,butPepsiisaproductthatusesthesametechnology(albeitdifferentingredients)tocompetehead-to-headwithCoke,soitisnotasubstitute.Increasedmarketingfordrinkingtapwatermight"shrinkthepie"forbothCokeandPepsi,whereasincreasedPepsiadvertisingwouldlikely"growthepie"(increaseconsumptionofallsoftdrinks),whilegivingPepsialargermarketshareatCoke'sexpense. Potentialfactors: Buyerpropensitytosubstitute.Thisaspectincorporatedbothtangibleandintangiblefactors.BrandloyaltycanbeveryimportantasintheCokeandPepsiexampleabove;howevercontractualandlegalbarriersarealsoeffective. Relativepriceperformanceofsubstitute Buyer'sswitchingcosts.Thisfactoriswellillustratedbythemobilityindustry.Uberanditsmanycompetitorstookadvantageoftheincumbenttaxiindustry'sdependenceonlegalbarrierstoentryandwhenthosefellaway,itwastrivialforcustomerstoswitch.Therewerenocostsaseverytransactionwasatomic,withnoincentiveforcustomersnottotryanotherproduct. PerceivedlevelofproductdifferentiationwhichisclassicMichaelPorterinthesensethatthereareonlytwobasicmechanismsforcompetition–lowestpriceordifferentiation.Developingmultipleproductsfornichemarketsisonewaytomitigatethisfactor. Numberofsubstituteproductsavailableinthemarket Easeofsubstitution Availabilityofclosesubstitutes Bargainingpowerofcustomers[edit] Thebargainingpowerofcustomersisalsodescribedasthemarketofoutputs:theabilityofcustomerstoputthefirmunderpressure,whichalsoaffectsthecustomer'ssensitivitytopricechanges.Firmscantakemeasurestoreducebuyerpower,suchasimplementingaloyaltyprogram.Buyers'powerishighifbuyershavemanyalternatives.Itislowiftheyhavefewchoices. Potentialfactors: Buyerconcentrationtofirmconcentrationratio Degreeofdependencyuponexistingchannelsofdistribution Bargainingleverage,particularlyinindustrieswithhighfixedcosts Buyerswitchingcosts Buyerinformationavailability Availabilityofexistingsubstituteproducts Buyerpricesensitivity Differentialadvantage(uniqueness)ofindustryproducts RFM(customervalue)Analysis Bargainingpowerofsuppliers[edit] Thebargainingpowerofsuppliersisalsodescribedasthemarketofinputs.Suppliersofrawmaterials,components,labor,andservices(suchasexpertise)tothefirmcanbeasourceofpoweroverthefirmwhentherearefewsubstitutes.Ifyouaremakingbiscuitsandthereisonlyonepersonwhosellsflour,youhavenoalternativebuttobuyitfromthem.Suppliersmayrefusetoworkwiththefirmorchargeexcessivelyhighpricesforuniqueresources. Potentialfactorsare: Supplierswitchingcostsrelativetofirmswitchingcosts Degreeofdifferentiationofinputs Impactofinputsoncostanddifferentiation Presenceofsubstituteinputs Strengthofdistributionchannel Supplierconcentrationtofirmconcentrationratio Employeesolidarity(e.g.laborunions) Suppliercompetition:theabilitytoforwardverticallyintegrateandcutoutthebuyer. Competitiverivalry[edit] Competitiverivalryisameasureoftheextentofcompetitionamongexistingfirms.Pricecuts,increasedadvertisingexpenditures,orinvestingonservice/productenhancementsandinnovationareallexamplesofcompetitivemovesthatmightlimitprofitabilityandleadtocompetitivemoves(Dhliwayo,Witness2022).Formostindustriestheintensityofcompetitiverivalryisthebiggestdeterminantofthecompetitivenessoftheindustry.Havinganunderstandingofindustryrivalsisvitaltosuccessfullymarketingaproduct.Positioningdependsonhowthepublicperceivesaproductanddistinguishesitfromthatofcompetitors.Anorganizationmustbeawareofitscompetitors'marketingstrategiesandpricingandalsobereactivetoanychangesmade.Rivalryamongcompetitorstendstobecutthroatandindustryprofitabilitylowwhilehavingthepotentialfactorsbelow: Potentialfactors: Sustainablecompetitiveadvantagethroughinnovation Competitionbetweenonlineandofflineorganizations Levelofadvertisingexpense PowerfulcompetitivestrategywhichcouldpotentiallyberealizedbyadheringtoPorter'sworkonlowcostversusdifferentiation. Firmconcentrationratio Factors,notforces[edit] Otherfactorsbelowshouldalsobeconsideredastheycancontributeinevaluatingafirm'sstrategicposition.Thesefactorscancommonlybemistakenforbeingtheunderlyingstructureofthefirm;however,theunderlyingstructureconsistsofthefivefactorsabove.[6] Industrygrowthrate[edit] Sometimesbadstrategydecisionscanbemadewhenanarrowfocusiskeptonthegrowthrateofanindustry.[7]Whilerapidgrowthinanindustrycanseemattractive,itcanalsoattractnewentrantsespeciallyifentrybarriersarelowandsuppliersarepowerful.[6]Furthermore,profitabilityisnotguaranteedifpowerfulsubstitutesbecomeavailabletothecustomers. Forexample,Blockbusterdominatedtherentalmarketthroughout1990s.In1998,ReedHastingsfoundedNetflixandenteredthemarket.Netflix'sCEOwasfamouslylaughedoutoftheroom.[8]WhileBlockbusterwasthrivingandexpandingrapidly,itskeypitfallwasignoringitscompetitorsandfocusingonitsgrowthintheindustry. Technologyandinnovation[edit] Technologyinitselfisarapidlygrowingindustry.Regardlessoftheadvancedgrowth,itpresentsitslimitations;suchascustomersnotbeingabletophysicallytouch/testproducts.Technologystandalonecannotalwaysprovideadesirableexperienceforacustomer."Boring"companiesthatareinhighentrybarrierindustrieswithhighswitchingcostsandprice-sensitivebuyerscanbemoreprofitablethan"techsavvy"companies.[9] Forexample,quitecommonlywebsiteswithmenusandonlinebookingoptionsattractcustomerstoarestaurant.Buttherestaurantexperiencecannotbedeliveredonlinewiththeuseoftechnology.FooddeliverycompanieslikeUberEatscandeliverthefoodtocustomersbutcannotreplacetherestaurantatmosphericexperience. Government[edit] Governmentcannotbeastandaloneforceasitisafactorthatcanaffectthefirmsstructureoffiveforcesabove.[5]Itisneithergoodorbadfortheindustry'sprofitability.[6] Forinstance, patentscanraisebarrierstoentry supplierpowercanberaisedbyunionfavoritismfromgovernmentpolicies[6] failingcompaniesreorganizingduetobankruptcylaws[6] Complementaryproductsandservices[edit] Similartogovernmentabove,complementaryproducts/servicescannotbeastandalonefactorbecauseit'snotnecessarilybadorgoodforindustry'sprofitability.[6]Complementsoccurwhencustomerbenefitsfrommultipleproductscombined.Individuallythosestandaloneproductscanberedundant.Forexample,acarwouldbeunusablewithoutpetrol/gasandadriver.Orforexampleacomputerisbestusedwithcomputersoftware.[9]Thisfactoriscontroversial(asdiscussedbelowinCriticisms)asmanybelieveittobe6thForce.However,complementsinfluencetheforcesmorethantheyformtheunderlyingstructureofmarket. Forinstance,complementscan influencebarriersofentrybyeitherloweringorraisingite.g.Appleprovidingsetoftoolstodevelopapps,lowersbarrierstoentry; makesubstitutioneasiere.g.SpotifyreplacingCDs Astrategyconsultsjobistoidentifycomplementsandapplytotheforcesabove.[6] Usage[edit] StrategyconsultantsoccasionallyusePorter'sfiveforcesframeworkwhenmakingaqualitativeevaluationofafirm'sstrategicposition.However,formostconsultants,theframeworkisonlyastartingpointandvaluechainanalysisoranothertypeofanalysismaybeusedinconjunctionwiththismodel.[10]Likeallgeneralframeworks,ananalysisthatusesittotheexclusionofspecificsaboutaparticularsituationisconsiderednaïve[bywhom?]. AccordingtoPorter,thefiveforcesframeworkshouldbeusedattheline-of-businessindustrylevel;itisnotdesignedtobeusedattheindustrygrouporindustrysectorlevel.Anindustryisdefinedatalower,morebasiclevel:amarketinwhichsimilarorcloselyrelatedproductsand/orservicesaresoldtobuyers(seeindustryinformation).Afirmwhichcompetesinasingleindustryshoulddevelop,ataminimum,onefiveforcesanalysisforitsindustry.Portermakesclearthatfordiversifiedcompanies,theprimaryissueincorporatestrategyistheselectionofindustries(linesofbusiness)inwhichthecompanywillcompete.TheaverageFortuneGlobal1,000companycompetesin52industries.[11] Criticisms[edit] Porter'sframeworkhasbeenchallengedbyotheracademicsandstrategists.Forinstance,KevinP.CoyneandSomuSubramaniamclaimthatthreedubiousassumptionsunderliethefiveforces: Thatbuyers,competitors,andsuppliersareunrelatedanddonotinteractandcollude. Thatthesourceofvalueisstructuraladvantage(creatingbarrierstoentry). Thatuncertaintyislow,allowingparticipantsinamarkettoplanforandrespondtochangesincompetitivebehavior.[12] AnimportantextensiontoPorter'sworkcamefromAdamBrandenburgerandBarryNalebuffofYaleSchoolofManagementinthemid-1990s.Usinggametheory,theyaddedtheconceptofcomplementors(alsocalled"the6thforce")totrytoexplainthereasoningbehindstrategicalliances.Complementorsareknownastheimpactofrelatedproductsandservicesalreadyinthemarket.[13]TheideathatcomplementorsarethesixthforcehasoftenbeencreditedtoAndrewGrove,formerCEOofIntelCorporation.MartynRichardJones,whileconsultingatGroupeBull,developedanaugmentedfiveforcesmodelinScotlandin1993.ItisbasedonPorter'sFrameworkandincludesGovernment(nationalandregional)aswellaspressuregroupsasthenotional6thforce.ThismodelwastheresultofworkcarriedoutaspartofGroupeBull'sKnowledgeAssetManagementOrganisationinitiative. Porterindirectlyrebuttedtheassertionsofotherforces,byreferringtoinnovation,government,andcomplementaryproductsandservicesas"factors"thataffectthefiveforces.[7] Itisalsoperhapsnotfeasibletoevaluatetheattractivenessofanindustryindependentlyoftheresourcesthatafirmbringstothatindustry.Itisthusargued(Wernerfelt1984)[14]thatthistheorybecombinedwiththeresource-basedview(RBV)inorderforthefirmtodevelopasounderframework. Othercriticismsinclude: Itplacestoomuchweightonthemacro-environmentanddoesn'tassessmorespecificareasofthebusinessthatalsoimpactcompetitivenessandprofitability[15] Itdoesnotprovideanyactionstohelpdealwithhighorlowforcethreats(e.g.,whatshouldmanagementdoifthereisahighthreatofsubstitution?)[15] Seealso[edit] Coopetition EconomicsofStrategy Industryclassification MarketingStrategy NationalDiamond Strategicmanagement Porter'sfourcornersmodel Nonmarketforces Valuechain Marketingmanagement References[edit] ^MichaelE.Porter,"HowCompetitiveForcesShapeStrategy",HarvardBusinessReview,May1979(Vol.57,No.2),pp.137–145. ^MichaelPorter,NicholasArgyresandAnitaM.McGahan,"AnInterviewwithMichaelPorter",TheAcademyofManagementExecutive16:2:44atJSTOR ^"13.BuildingSocialStrategyatXCardandHarvardBusinessReview",ASocialStrategy,Princeton:PrincetonUniversityPress,pp. 220–248,2014-12-31,doi:10.1515/9781400850020-014,ISBN 978-1-4008-5002-0,retrieved2020-11-08 ^Rainer,R.Kelly,Jr.,1949-(2012).Introductiontoinformationsystems.Cegielski,CaseyG.(4thed.,Internationalstudentversion ed.).Hoboken,N.J.ISBN 978-1-118-09230-9.OCLC 829653718.{{citebook}}:CS1maint:multiplenames:authorslist(link) ^abPorter,MichaelE.(2008)."TheFiveCompetitiveForcesThatShapeStrategy".Competitivestrategy.HarvardBusinessReview.86(1):78–93,137.PMID 18271320. ^abcdefgPorter,MichaelE.(1989),"HowCompetitiveForcesShapeStrategy",ReadingsinStrategicManagement,London:MacmillanEducationUK,pp. 133–143,doi:10.1007/978-1-349-20317-8_10,ISBN 978-0-333-51809-0,retrieved2020-11-08 ^abMichaelE.Porter."TheFiveCompetitiveForcesthatShapeStrategy",HarvardBusinessReview,January2008(Vol.88,No.1),pp.78–93.PDF ^Levin,Sam(2019-09-14)."Netflixco-founder:'Blockbusterlaughedatus…Nowthere'soneleft'".TheGuardian.ISSN 0261-3077.Retrieved2020-11-08. ^ab"InternationalStrategy",TheArtofStrategy,CambridgeUniversityPress,pp. 229–251,2018,doi:10.1017/9781108572507.013,ISBN 978-1-108-57250-7,retrieved2020-11-08 ^Tang,David(21October2014)."IntroductiontoStrategyDevelopmentandStrategyExecution".Flevy.Retrieved2November2014. ^"ExternalInputstoStrategy|BoundlessManagement".courses.lumenlearning.com.Retrieved2017-12-06. ^KevinP.CoyneandSomuSubramaniam,"BringingDisciplinetoStrategy,McKinseyQuarterly,1996,(Vol.33,No.4),pp.14–25. ^Brandenburger,A.M.,&Nalebuff,B.J.(1995).TheRightGame:UseGameTheorytoShapeStrategy.HarvardBusinessReview,(Vol.73,No.4),57–71.PDF ^Wernerfelt,B.(1984),AResource-basedViewoftheFirm,StrategicManagementJournal,Vol.5:pp.171–180PDF ^abGrundy,Tony(2006)."RethinkingandreinventingMichaelPorter'sfiveforcesmodel".StrategicChange.15(5):213–229.doi:10.1002/jsc.764.ISSN 1086-1718. Furtherreading[edit] WikimediaCommonshasmediarelatedtoPorter'sFiveForcesModel. Coyne,K.P.andSujitBalakrishnan(1996),Bringingdisciplinetostrategy,TheMcKinseyQuarterly,No.4. Porter,M.E.(March–April1979)HowCompetitiveForcesShapeStrategy,HarvardBusinessReview. Porter,M.E.(1980)CompetitiveStrategy,FreePress,NewYork. Porter,M.E.(January2008)TheFiveCompetitiveForcesThatShapeStrategy,HarvardBusinessReview. Ireland,R.D.,Hoskisson,R.andHitt,M.(2008).Understandingbusinessstrategy:Conceptsandcases.CengageLearning. RainerR.K.andTurbanE.(2009),IntroductiontoInformationSystems(2ndedition),Wiley,pp36–41. KotlerP.(1997),MarketingManagement,Prentice-Hall,Inc. Mintzberg,H.,Ahlstrand,B.andLampelJ.(1998)StrategySafari,Simon&Schuster. vteStrategicplanningtools Ansoffmatrix Balancedscorecard Competitoranalysis Growth–sharematrix Mindmap PESTanalysis Porter'sfiveforcesanalysis Scenarioplanning SWOTanalysis Segmenting-targeting-positioning OGSM Managerialgridmodel MECEprinciple Retrievedfrom"https://en.wikipedia.org/w/index.php?title=Porter%27s_five_forces_analysis&oldid=1113583067" Categories:StrategicmanagementBusinessplanningBusinesstermsMichaelPorterCorporatedevelopmentHiddencategories:CS1maint:multiplenames:authorslistArticleswithshortdescriptionShortdescriptionmatchesWikidataAllarticleswithunsourcedstatementsArticleswithunsourcedstatementsfromApril2020Articleswithspecificallymarkedweasel-wordedphrasesfromDecember2018CommonscategorylinkisonWikidataArticlescontainingvideoclips Navigationmenu Personaltools NotloggedinTalkContributionsCreateaccountLogin Namespaces ArticleTalk English Views ReadEditViewhistory More Search Navigation MainpageContentsCurrenteventsRandomarticleAboutWikipediaContactusDonate Contribute HelpLearntoeditCommunityportalRecentchangesUploadfile Tools WhatlinkshereRelatedchangesUploadfileSpecialpagesPermanentlinkPageinformationCitethispageWikidataitem Print/export DownloadasPDFPrintableversion Inotherprojects WikimediaCommons Languages العربيةБългарскиCatalàČeštinaDeutschΕλληνικάEspañolFrançais한국어ՀայերենHrvatskiBahasaIndonesiaItalianoעבריתLatviešuMagyarമലയാളംမြန်မာဘာသာNederlands日本語NorskbokmålPolskiPortuguêsРусскийසිංහලSlovenčinaSuomiSvenskaУкраїнськаاردوTiếngViệt粵語中文 Editlinks