Porter Five Forces Analysis

Porter five forces analysisis a framework for industry analysis and business scheme development formed byMichael E. PorterofHarvard Business Schoolin 1979. It draws uponindustrial organizationeconomicsto derive five forces that determine the competitive vividness and therefore attractiveness of amarket. Attractiveness in this context refers to the overall industry profit top executive. An unattractive industry is one in which the combination of these five forces acts to drive down overall profitability.A real unattractive industry would be one approaching pure competition, in which available profits for all firmlys atomic number 18 driven tonormal profit. quintuple forces Threat of red-hot-fangled competition Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will fall down profitability for all firms in the industry. Unless the entry of new firms can be blocked byincumbents, the abnormal profit rate will t end towards zilch (perfect competition). * The existence ofbarriers to entry(patents,rights, etc. The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit comfortably. * Economies of product differences * Brand equity * Switching costs orsunk costs * Capital requirements * Access to distribution * Customer loyaltyto established brands * Absolute cost * Industry profitability the more profitable the industry the more attractive it will be to new competitors. Threat of substitute products or services The existence of products outside of the realm of the common product boundaries increases thepropensityof customers to switch to alternatives.Note that this should not be confused with competitors confusable products but entirely different ones instead. For example, belt water might be considered a substitute for Coke, whereas Pepsi is a competitors similar product. Increased marketing for drinking tap water might shrink the pie for both Coke and Pepsi, whereas increased Pepsi advertising would likely grow the pie (increase consumption of all soft drinks), albeit while giving Pepsi a larger slice at Cokes write off. * buyer propensity to substitute * Relative price performance of substitute Buyerswitching costs * Perceived train ofproduct differentiation * Number of substitute products available in the market * Ease of substitution. Information-based products are more prone to substitution, as online product can easily replace material product. * Substandard product * Quality depreciation Bargaining power of customers (buyers) The negotiate power of customers is also described as the market of outputs the ability of customers to put thefirmunder pressure, which also affects the customers sensitivity to price changes. Buyer concentration tofirmconcentration ratio * Degree of dependency upon existing convey of distribution * Bargaining leverage, particularly in ind ustries with highfixed cost * Buyer switching costs relative tofirmswitching costs * Buyer information availability * Availability of existing substitute products * Buyerprice sensitivity * Differential advantage (uniqueness) of industry products * RFMAnalysis Bargaining power of suppliers The bargaining power of suppliers is also described as the market of inputs. suppliers of raw materials, components, labor, and services (such as expertise) to thefirmcan be a source of power over the firm, when there are few substitutes. Suppliers may refuse to work with the firm, or, e. g. , charge excessively high prices for unique resources. * Supplier switching costs relative tofirmswitching costs * Degree of differentiation of inputs * Impact of inputs on cost or differentiation * Presence of substitute inputs * Strength of distribution channel * Supplier concentration tofirmconcentration ratio * Employee solidarity (e. g. labor unions) Supplier competition ability to forward vertically int egrate and cut out the BUYER Ex. If you are making biscuits and there is only one person who sells flour, you have no alternative but to buy it from him. Intensity of competitive rivalry For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry. * Sustainablecompetitive advantagethroughinnovation * Competition between online and offline companies * Level ofadvertisingexpense * Powerfulcompetitive strategy * Flexibility through customization, volume and variety