Wednesday, 7 April 2010

Porter's 5 Forces Analysis

Porter's 5 Forces model provides a strategic analysis tool for analysing the competitive forces in an industry.
Sample issues to consider include:
  • Bargaining power of suppliers
    • Extracting a higher margin
    • Forward integrating
    • Firm:supplier concentration ratio
    • Employee solidarity
  • Bargaining power of Buyers/distributors
    • Price sensitivity
    • Backward integration
    • Switching costs
    • Buyer:firm concentration ratio
  • Threat of new entrants
    • Industry profitability
    • Barriers to entry (scale-based, relationship-based or legal)
  • Threat of substitutes
    • Disruptive change
    • Perceived level of differentiation
    • Level of price/performance of substitute
    • Ease of substitution (fungibility)
  • Rivalry
    • Concentration & stability
    • Industry growth rates
    • Scarcity of resources
Some references add a 6th force, which may either be complementors, the government, regulators or the public.   In truth, the model could be extended to incorporate any significant stakeholder.

When doing a Porter 5 Forces analysis, one should not ignore that the various players may interact with each other, even collude, and are likely to respond to strategic changes from the firm and from each other.   The competitive forces in the 5 forces analysis, may, therefore, be constantly shifting.   Game theory may help to uncover the likely patterns in such unstable competitive fields.