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Porter's Five Forces
Note: Incumbent,= a company already present in the industry

THE FIVE FORCES IN ESSENCE

Different industries can sustain different levels of profitability; part of this difference is explained by industry structure.

Michael Porter provided a framework that models an industry as being influenced by five forces.

The extended rivalry that results from all fiveforces defines an industry’s structure and shapes the nature of competitive interaction within this industry.

Industry structure grows out of a set of characteristics that determine the strength of each competitive force.

If the forces are intense almost no company earns attractive returns on investment.
(f.i. textile airlines)

If the forces are benign many companies are profitable.
(f.i.software, toiletries,..)

The strongest competitive force/s determines the profitability of an industry and become the most important to strategy formulation.

Diagram of Porter's 5 Forces
  | SUPPLIER POWER
Supplier concentration
Importance of volume to supplier
Differentiation of inputs
Impact of inputs on cost or differentiation
Switching costs of firms in the industry
Presenceof substitute inputs
Threat of forward integration
Cost relative to total purchases in industry |   |
THREAT OF
NEW ENTRANTS
Barriers to Entry
Absolute cost advantages
Proprietary learning curve
Access to inputs
Government policy
Economies of scale
Capital requirements
Brand identity
Switching costs
Access to distribution
Expected retaliation
Proprietary products| | THREAT OF
SUBSTITUTES
-Switching costs
-Buyer inclination to
 substitute
-Price-performance
 trade-off of substitutes |
  | BUYER POWER
Bargaining leverage
Buyer volume
Buyer information
Brand identity
Price sensitivity
Threat of backward integration
Product differentiation
Buyer concentration vs. industry
Substitutes available
Buyers' incentives | DEGREE OFRIVALRY
-Exit barriers
-Industry concentration
-Fixed costs/Value added
-Industry growth
-Intermittent overcapacity
-Product differences
-Switching costs
-Brand identity
-Diversity of rivals
-Corporate stakes |

 I. Rivalry among existing competitors
The intensity of rivalry among firms varies across industries, and strategic analysts are interested in these differences.High rivalry limits the profitability of an industry.
The degree to which rivalry drives down an industry’s profit potential depends on:
* The intensity with which companies compete:

1. Competitors are numerous or are +- equal in size and power.
2. Industry growth is slow. Slow growth = fights for market share.
3. High Exit barriers (Highly specialized companies that cannot exitthe industry).
4. Rivals are highly committed to the business and have aspirations for leadership.

* The basis on which they compete.

1. PRICE COMPETITION Rivalry is especially destructive to profitability if it gravitates solely to price because price competition transfers profits directly from an industry to its customers. Price competition occurs if :

* Products orservices of rivals are nearly identical and there are few switching costs for buyers.
* Fixed costs are high and marginal costs are low.
* Capacity must be expanded in large increments to be efficient.
* The product is perishable.

2. Competition on dimensions other than price: Product features, support services, delivery time, or brand image. Less likely toerode profitability owing to:
* Improves customer value and can support higher prices.
* Rivalry focused on such dimensions can improve value relative to substitutes or raise the barriers facing new entrants.

ZERO-SUM COMPETITION: When all or many competitors aim to meet the same needs or compete on the same attributes.

POSITIVE-SUM COMPETITION: Serve diverse customer...