Porter’s Five Forces Model

Zeeshan Qureshi35727MBA-C

2

Analyzing Industry Structure

Opportunities and threats are competitive challenges arising for changes in industry conditions.

Analytic tools such as the five forces model help

managers formulate appropriate strategic

responses.

3Source: Adapted and reprinted by permission of Harvard Business Review. An exhibit from “How Competitive Forces Shape Strategy” by Michael E.. Porter (March-April 1979), Copyright © 1979 by the President and Fellows of Harvard College: all rights reserved.

The Five Forces Model

FIGURE 3.1

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Potential Competitors

New entrants into an industry threaten incumbent companies.

Barriers to entry: Brand loyalty Absolute cost advantages Economies of scale Switching costs Government regulation

Entry barriers reduce the threat of new and additional competition.

5

Rivalry Among Established Companies

The intensity of competitive rivalry in an industry arises from: Industry’s competitive structure. Demand (growth or decline) conditions in

industry. Height of industry exit barriers.

6

The Bargaining Power of Buyers

Buyers are most powerful when: There are many small sellers and few large

buyers. Buyers purchase in large quantities. A single buyer is a large customer to a firm. Buyers can switch suppliers at low cost. Buyers purchase from multiple sellers at once. Buyers can easily vertically integrate to

compete with suppliers.

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The Bargaining Power of Suppliers

Suppliers have bargaining power when: Their products have few substitutes and are important to

buyers. The buyer’s industry is not an important customer to the

supplier. Differentiation makes it costly for buyers to switch

suppliers. Suppliers can vertically integrate forward to compete

with buyers and buyers can’t integrate backward to supply their own needs.

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Substitute Products

The competitive threat of substitute products increases as they come closer to serving similar customer needs.

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A Sixth Force: Complementors

Complementors (Adam Brandenburger):

Companies whose products are sold in tandem with another company’s products.

Increased supply of a complementary product collaterally increases demand for the primary product.

Example: Faster CPU chips fuel sales

of personal computers.(e.g. Microsoft and Intel)

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Conclusion

Total Quality Management principles remain a requirement for success. “Organizations are made up of a complex system of customers and suppliers, with every individual executive, manager, and worker functioning as both a supplier and a customer.” (Finnigan, Schmidt; 5.)

Although many firms don’t use the TQM label any more, for most top companies customer driven quality has become a way of doing business. “They apply the notion of Return on Quality (ROC) and they make certain that the quality they offer is the quality that customers want.” (Kotler, Armstong; 681.)

This quality then results in what every company wants, improved sales and higher profits.