Porter five forces analysis

The industry structure analysis by the Five Forces model ( engl. five forces ) is in strategic management developed by Michael E. Porter tool for strategy analysis in corporate planning. The results of this analysis are often incorporated as an environmental analysis in a SWOT analysis, where the forces are described that act on the external environment of the company.

  • 3.1 Requirements
  • 3.2 Advantages
  • 3.3 disadvantages

Basics

The origin of the model is the industrial organization approach. The basic idea is that determines the attractiveness of the market mainly due to the market structure. The market structure in turn influences the strategic behavior of firms, that is, its competitive strategy, which in turn determines their market success. Thus, the success of a company is therefore at least indirectly by the market structure dependent.

The model is based on the idea that the attractiveness of an industry is determined by the expression of the five main competitive forces:

The stronger the threat of these five competitive forces, the less attractive is the considered industry and the harder it is to achieve a sustainable competitive advantage.

Companies should therefore, try to work in an industry with attractive industry structure and build a defensible position in their industry, so a position in which the five competitive forces have as little menacing expression.

Companies can also act on the five forces with the aid of appropriate strategic orientation. This may increase the attractiveness of an industry. However, if the distribution company of competitive forces influence for the benefit of its own competitive position, it may not turn out to be about the long -term consequences understood or consciously accept these destroy the structure and profitability of an industry as well.

The five forces

Note: The five forces are always based on the entire industry. A typical mistake is to apply the following criteria analysis on a single company. The results of such analysis will have respective defects.

This requires - at least operative - Definition of the industry (English industry ) before the attempted analysis. Porter defines industry as ... a group of firms Producing products are close substitutes did for each other. ( ... a group of companies that produce closely related substitutes. ) This industry is then examined the following characteristics each factor (force).

Rivalry among existing competitors ( engl. intensity of competitive rivalry )

The intensity of the competition between the companies on the market is high when more of the following factors apply:

  • There are many similar types of competitors available;
  • Slow growth of the industry;
  • Capacity can be increased only in large volumes;
  • There are many different competitors ( diversified products ); Product differentiation;
  • There are high strategic risks;
  • There are high market exit barriers (English Exit Barriers ) as the following: specialized equipment
  • Fixed costs of decommissioning
  • Strategic tie points (gas and oil)
  • Emotional barriers ( my father founded ... )
  • Governmental or societal barriers ( post, rail ... )

Threat of new entrants (English threat of entry)

The existence of entry barriers (English Barriers to Entry) limits the number of firms in the market and thus influences the ' rivalry among existing competitors '. Stepping on the market to new entrants, competitive advantages are directly affected. The new arrival walks with new capacity on the existing market demand, where he must participate. This additional supply for the same demand pushes the return of market participants. The threat of new entrants is high when the barriers to entry are low. Porter calls 6 significant barriers to access:

  • Returns to scale (English economies of scale)
  • Product differentiation ( engl. differentiation )
  • Capital requirements (English capital requirements )
  • Switching costs ( engl. switching cost)
  • Access to distribution channels (English access to distribution channels)
  • Cost disadvantages independent of scale ( engl. cost disadvantages independent of scale).
  • Proprietary product technology - Know- how, patents, designs, etc.
  • Advantaged access to raw material - natural monopoly, Porter mentions only raw material, but we can interpret as ' access to resources ', such as the landing rights at airports where an airline can gain advantages over others.
  • Location advantages - established businesses often have already occupied the sites, which allow the easiest access to raw materials, markets, distributors, etc..
  • Subsidies - subsidies provide established companies often lasting benefits.
  • Learning curve (English economies of learning) - A learning curve shows up when on the rising production cost is not directly proportional to rise, but a learning effect (ie, improved production technology, savings, etc.) lowers costs. Here, companies that have produced large amounts, an advantage over new entrants.

Bargaining power of suppliers ( engl. bargaining power of suppliers )

Suppliers can search for an industry pose a risk if they threaten to increase the prices of goods or services. Powerful suppliers can thereby reduce the profitability of an industry that can not contribute to their own markets again increased costs. The conditions under which a supplier is ' powerful ', largely reflect those who make a customers ' powerful '. A vendor branch is ' powerful ' when the following factors are present:

  • The industry is dominated by a few companies and is more concentrated than the buying industry
  • For the products bought by the decreasing industry products or services, there is little threat of substitute products
  • The declining industry is not an important customer of the supplying industry
  • The products / services delivered represent a significant contribution to the customer's industry is
  • The products / services the supplying industry are differentiated or have built up switching costs
  • The supplying industry can credibly threaten forward integration in the customer's industry

Bargaining power of buyers ( engl. bargaining power of buyers )

Purchasers ( customers ) are connected with an industry so far in competition, as they push prices to prevail better qualities or can force expanded services if they have a high market power. This reduces the profitability within the industry.

A buyer group is powerful if the following conditions are true:

  • The customer group is highly concentrated or purchases large volumes compared to the total turnover of the industry
  • The related products / services are standardized or undifferentiated ( eg, gasoline )
  • The customer's industry must take only small switching costs in buying
  • The customer's industry is located in a little profitable business situation
  • The customer's industry can credibly threaten with backward integration into the supply industry (eg VW and Ford have substantial capacities in manufacturing suppliers, which can be extended )
  • The related products / services are irrelevant to the quality of products / services the customer's industry.
  • The customer's industry has complete information

Threat of substitute products ( engl. threat of substitutes )

In the broadest sense, all competitors in an industry compete with industries producing substitutes. Substitutes limit the potential profits of an industry by placing an absolute limit for the prices that can call on the industry for their products / services.

For identification of substitutes is a search for products / services that can fulfill the same function as the product of the considered industry. This can be a difficult task at times, which guides the analyst in industries that are seemingly far removed from the examined industries (eg make fast food restaurants a competition for kitchen appliances manufacturer is ).

The following criteria are not listed in Competitive Strategy ( Porter).

The influence of substitutes is high when

  • There is only a small distinct product loyalty in the market
  • Turn the switching costs from the original in the substitute low
  • Expire licenses and patents
  • The prices of the original are relatively high and performance compromising the substitute will be accepted as acceptable at significantly low prices

Governments as a determinant of industry structure (so called Government as a Force in Industry Competition)

Governments are not included in the model as an independent force. Nevertheless, Porter leads in Strategic Analysis governments as an essential influencers on the forces.

Governments were primarily analyzed for their potential impact on the barriers to entry, but have a potential impact on many - if not all - aspects of the industry structure - are considered - both directly and indirectly. For many industries, governments provide customers (eg defense industries ) or suppliers (eg, wood ) that also government actions affect both customers and suppliers. The current legislation can change the position of an industry in terms of substitutes (eg, asbestos, cadmium, leaded gasoline).

Criticism

Requirements

  • Competition and the profit motive are required: industries in which no profit target is tracked (non-profit organizations such as Red Cross, military) are not taken into account by the model ( although the use of the model can bring some insight).

Benefits

  • Ensure systematic and comprehensive consideration of the relevant factors in the competition
  • Especially in the initial phase of a strategic analysis useful in understanding the industry
  • Model allows to assess opportunities and risks
  • Provides opportunity to examine complex interaction of competitors in an industry in a structured way and to evaluate

Disadvantages

  • The model generates snapshots. Markets with higher competition dynamics ( Schumpeterische competition) are difficult to be detected, because they change so quickly that very often new models need to be created.
  • Are considered only structural features.
  • Assumption of continuous competition - Restrictions on the industry analysis only on competitive relationships, but there are in practice collaborations.
  • The model takes into account only one industry. Complementors, ie industries that will complement its own product not taken into account; for example, are computer software without dead mass and computer software without intellectual jogging. The interactions between these sectors is covered by the industry structure analysis insufficiently.
  • Application of Porter can affect overall economic welfare reducing, for example, by the construction of very high barriers to entry to deter new competitors.

Swell

  • Strategy Management
  • Competition Theory
Michael Porter Porter's generic strategies Experience curve effects
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