Money

Porter's Five Forces

A MODEL FOR INDUSTRY ANALYSIS

The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure.

Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates.

Diagram of Porter's 5 Forces

SUPPLIER POWER

Supplier concentration

Importance of volume to supplier

Differentiation of inputs

Impact of inputs on cost or differentiation

Switching costs of firms in the industry

Presence of substitute inputs

Threat of forward integration

Cost relative to total purchases in industry

BARRIERS

TO ENTRY

Absolute cost advantages

Proprietary learning curve

Access to inputs

Government policy

Economies of scale

Capital requirements

Brand identity

Switching costs

Access to distribution

Expected retaliation

Proprietary products THREAT OF

SUBSTITUTES

-Switching costs

-Buyer inclination to

substitute

-Price-performance

trade-off of substitutes

BUYER POWER

Bargaining leverage

Buyer volume

Buyer information

Brand identity

Price sensitivity

Threat of backward integration

Product differentiation

Buyer concentration vs. industry

Substitutes available

Buyers' incentives DEGREE OF RIVALRY

-Exit barriers

-Industry concentration

-Fixed costs/Value added

-Industry growth

-Intermittent overcapacity

-Product differences

-Switching costs

-Brand identity

-Diversity of rivals

-Corporate stakes

I. Rivalry

In the traditional economic model, competition among rival firms drives profits to zero. But competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms strive for a competitive advantage