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Porters 5 forces analysis is a framework for industry analysis and business strategy development developed by Michael E. Porter in 1979 of Harvard Business School.
It uses concepts developed in Industrial Organization (IO) economics to derive 5 forces that determine the competitive intensity and therefore attractiveness of a market. Porter referred to these forces as the microenvironment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace.
Strategy consultants use Porters five forces framework when making a qualitative evaluation of a firms strategic position. The framework is textbook material for modern business studies and therefore widely known.
Porters Five Forces include three forces from horizontal competition: threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces from vertical competition: the bargaining power of suppliers, bargaining power of customers.
Each of these forces has several determinants:
A graphical representation of Porters Five Forces
The threat of substitute products
The existence of close substitute products increases the propensity of customers to switch to alternatives in response to price increases (high elasticity of demand).
buyer propensity to substitute
relative price performance of substitutes
buyer switching costs
perceived level of product differentiation
The threat of the entry of new competitors
Profitable markets that yield high returns will draw firms. The results is many new entrants, which will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level (perfect competition).
the existence of barriers to entry (patents, rights, etc.)
economies of product differences
brand equity
switching costs or sunk costs
capital requirements
access to distribution
absolute cost advantages
learning curve advantages
expected retaliation by incumbents
government policies
The intensity of competitive rivalry
For most industries, this is the major determinant of the competitiveness of the industry. Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc.
number of competitors
rate of industry growth
intermittent industry overcapacity