Porter five forces analysis - Wikipedia

What is Porter’s Five Forces Framework?

A method to analyze a business’s competitive environment, derived from industrial organization economics, to assess industry profitability based on five forces.

Who developed Porter’s Five Forces Framework and when?

Michael E. Porter of Harvard University, first published in Harvard Business Review in 1979.

What are the five forces in Porter’s framework?

Threat of new entrants, threat of substitutes, bargaining power of customers, bargaining power of suppliers, and competitive rivalry.

How does Porter distinguish the five forces from the macroenvironment?

The five forces are the microenvironment, forces close to a company affecting its ability to serve customers and profit, unlike the broader macroenvironment.

Why is an industry considered unattractive in Porter’s framework?

When the five forces reduce overall profitability, driving profits to normal levels, as in pure competition.

What is the threat of new entrants?

New competitors entering an industry, pressuring prices, costs, and investments needed to maintain market share.

What are barriers to entry?

Advantages existing companies have over new entrants, such as economies of scale, customer switching costs, or government policies, reducing the threat of new entrants.

Name three major sources of entry barriers.

Supply-side economies of scale, demand-side benefits of scale (network effect), and customer switching costs.

What is the threat of substitutes?

Products using different technology to meet the same need (e.g., tap water vs. Coke), which can reduce demand for an industry’s products.

What factors influence the threat of substitutes?

Buyer propensity to substitute, relative price performance of substitutes, buyer switching costs, and perceived product differentiation.

What is the bargaining power of customers?

The ability of customers to pressure a firm, affecting price sensitivity, especially when customers have many alternatives.

What factors affect the bargaining power of customers?

Buyer concentration, bargaining leverage, buyer information availability, and availability of substitute products.

What is the bargaining power of suppliers?

The ability of suppliers to pressure a firm by charging high prices or refusing to work, especially when substitutes for their inputs are scarce.

What factors influence the bargaining power of suppliers?

Supplier switching costs, degree of input differentiation, presence of substitute inputs, and supplier concentration.

What is competitive rivalry?

The extent of competition among existing firms, driven by price cuts, advertising, or innovation, impacting industry profitability.

What factors drive competitive rivalry?

Sustainable competitive advantage through innovation, level of advertising expense, and powerful competitive strategies (low cost or differentiation).

How does Porter’s Five Forces differ from SWOT analysis?

Porter’s framework is more rigorous and based on the structure-conduct-performance paradigm, unlike the less structured SWOT analysis.

What is the role of complementary products in Porter’s framework?

Complements (e.g., cars and petrol) influence the five forces (e.g., lowering entry barriers or easing substitution) but are not a standalone force.

What are some criticisms of Porter’s Five Forces?

Assumes unrelated buyers/competitors, focuses on structural advantage, assumes low uncertainty, and overlooks specific business areas or actionable responses.

How should Porter’s Five Forces be used according to Porter?

At the line-of-business industry level, not for broad industry groups, often combined with tools like value chain analysis for a complete strategy.