The Five Forces - Institute For Strategy And Competitiveness

The Five Forces · Threat of New Entrants · Bargaining Power of Suppliers · Bargaining Power of Buyers · Threat of Substitute Products or Services · Rivalry Among ... HBS→ISC→Strategy Strategy StrategyExplained BusinessStrategy CreatingaSuccessfulStrategy CorporateStrategy TheRoleofLeaders RelatedTopics →BusinessStrategy BusinessStrategy TheFiveForces StrategicPositioning TheValueChain OperationalEffectivenessvs.Strategy →TheFiveForces Strategy → BusinessStrategy → TheFiveForces ×BusinessStrategy TheFiveForces StrategicPositioning TheValueChain OperationalEffectivenessvs.Strategy TheFiveForces ThreatofSubstituteProductsorServices BargainingPowerofSuppliers BargainingPowerofBuyers ThreatofNewEntrants RivalryAmongExistingCompetitors TheFiveForcesisaframeworkforunderstandingthecompetitiveforcesatwork inanindustry,andwhichdrivethewayeconomicvalueisdividedamongindustryactors. FirstdescribedbyMichaelPorterinhisclassic1979HarvardBusinessReviewarticle,Porter’sinsightsstartedarevolutioninthestrategyfieldandcontinue toshapebusinesspracticeandacademicthinkingtoday. AFiveForcesanalysiscanhelpcompaniesassessindustryattractiveness,how trendswillaffectindustrycompetition,whichindustriesacompanyshouldcompete in—andhowcompaniescanpositionthemselvesforsuccess. ThreatofNewEntrants Thethreatofnewentrantsintoanindustrycanforcecurrentplayerstokeep pricesdownandspendmoretoretaincustomers.Actually,entrybringsnewcapacity andpressureonpricesandcosts. Thethreatofentry,therefore,putsacapontheprofitpotentialofanindustry. Thisthreatdependsonthesizeofaseriesofbarrierstoentry,including economiesofscale,tothecostofbuildingbrandawareness,toaccessingdistribution channels,togovernmentrestrictions. Thethreatofentryalsodependsonthecapabilitiesofthelikelypotential entrants. Iftherearewellestablishedcompaniesintheindustryoperatinginothergeographic regions,forexample,thethreatofentryrises. BargainingPowerofSuppliers Companiesineveryindustrypurchasevariousinputsfromsuppliers,whichaccount fordifferingproportionsofcost.Powerfulsupplierscanusetheirnegotiatingleverage tochargehigherpricesordemandmorefavorabletermsfromindustrycompetitors, whichlowersindustryprofitability. Ifthereareonlyoneortwosuppliersofanessentialinputproduct,forexample, orifswitchingsuppliersisexpensiveortimeconsuming,asuppliergroupwields morepower. BargainingPowerofBuyers Powerfulcustomerscanusetheirclouttoforcepricesdownordemandmoreservice atexistingprices,thuscapturingmorevalueforthemselves.Buyerpowerishighest whenbuyersarelargerelativetothecompetitorsservingthem, productsareundifferentiatedandrepresentasignificantcostforthebuyer, andtherearefewswitchingcoststoshiftingbusinessfromonecompetitortoanother. Theycanplayrivalsagainsteachother—especiallyifanindustry’sproducts areundifferentiated,it’sinexpensivetoswitchloyalties,andpricetrumpsquality. Theremaybemultiplebuyersegmentsinagivenindustrywithdifferentlevels ofpower. ThreatofSubstituteProductsorServices Asubstituteisanotherproductorservicethatmeetsthesameunderlyingneed thattheindustry’sproductmeetsinadifferentway.Videoconferencingisasubstitute fortravel.Emailisasubstituteforexpressmail. Thethreatofasubstituteishighifitoffersanattractiveprice-performance trade-offversustheindustry’sproduct,especiallyifthebuyer’scostofswitching tothesubstituteislow. RivalryAmongExistingCompetitors Ifrivalryisintense,itdrivesdownpricesordissipatesprofitsbyraising thecostofcompeting.Companiescompeteawaythevaluetheycreate. Rivalrytendstobeespeciallyfierceif: Competitorsarenumerousorareroughlyequalinsizeandmarketposition Industrygrowthisslow Therearehighfixedcosts,whichcreateincentivesforpricecutting Exitbarriersarehigh Rivalsarehighlycommittedtothebusiness Firmshavedifferinggoals,diverseapproachestocompeting,orlackfamiliaritywith oneanother FirstdescribedbyMichaelPorterinhisclassic1979HarvardBusinessReviewarticle,Porter’sinsightsstartedarevolutioninthestrategyfield,andcontinue toshapebusinesspracticeandacademicthinking. AFiveForcesanalysiscanhelpcompaniesassesswhichindustriestocompete in—andhowtopositionthemselvesforsuccess. KeyIndustryStructure Concepts Everyindustryisdifferent,buttheunderlyingdriversofprofitablyarethesameineveryindustry. ShareThis: TheFiveForcesdeterminethecompetitivestructureofanindustry,anditsprofitability.Industrystructure,togetherwithacompany'srelativepositionwithintheindustry,arethetwobasicdriversofcompanyprofitability.  ShareThis: AnalyzingtheFiveForcescanhelpcompaniesanticipateshiftsincompetition,shapehowindustrystructureevolves,andfindbetterstrategicpositionswithintheindustry.  ShareThis: HowtheFiveForcesWork ReadfullanalysisonInternationalAirTransportAssociationVision2050   IndustryStructureisDynamic Industrystructurechangesovertime, andis not static. Overtime,buyersorsupplierscanbecomemoreorlesspowerful. Technologicalormanagerial innovations canmakenewentryorsubstitutionmoreorlesslikely. Changesinregulationcanchangetheintensityofrivalry,oraffectbarrierstoentry.Choicesbycompetition,suchasnewpricingordistributionapproaches,canalsoaffectthepathofindustrycompetition.  FiveForcesanalysisisessentialto anticipateandexploitindustry structuralchange.  RelatedResources01Jan2008HarvardBusinessReviewTheFiveCompetitiveForcesThatShapeStrategybyMichaelE.Porter 16Dec2012HarvardBusinessSchoolPublishingUnderstandingMichaelPorter:TheEssentialGuidetoCompetitionandStrategybyJoanMagretta 09Sep2008HarvardBusinessSchoolPublishingOnCompetition,UpdatedandExpandedEditionbyMichaelE.Porter  ViewAllRelatedResources