Porter'S Five Forces
Porter'S Five Forces
LECTURE 9
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Industry analysis as the context for strategy
• 1980s classical strategy development by Michael Porter: analysing the firm’s
competitive position in its industry and developing appropriate strategies of
positioning
• What is the industry?
A space where firms compete: can be defined in national or larger terms,
depending on how markets are shaped by regulatory arrangements,
consumer preferences etc
Firms may compete in many markets
Porter’s analysis of industry adds some structure to a simply descriptive
account of pressures on firms in a particular industry
• Not always easy to recognise an ‘industry’: changing boundaries?; extent of
overlap of inputs, technologies or customers?
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Porter’s Five Forces Model: ‘positioning’
• Porter’s 5 forces: helps to focus on where and how firms should try to
position themselves (which markets, what forms of differentiation)
‘the corporate strategist's goal is to find a position in the industry
where his or her company can best defend itself against these forces
or can influence them in its favor’ (Porter 1979 p.137)
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The Five-Forces Model of Competition
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The Five-Forces Model
• Potential Entry of New Competitors
• New entrants increase intensity of competitiveness
• Quality, pricing, and marketing can overcome barriers
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Barriers to Entry
• Economies of scale
• Product differentiation
• Capital requirements
• Access to distribution channels
• Government policy (e.g., telecoms need to obtain
license from government for 3G, 4G etc..)
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Barriers to Entry
• Tariffs
• Lack of access to raw materials
• Possession of patents (e.g., pharmaceuticals file
patents to protect inventions)
• Undesirable locations
• Potential saturation of the market
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The Five-Forces Model
• Bargaining Power of Suppliers is increased when
there are:
• Few numbers of suppliers
• Few substitutes
• Costs of switching raw materials is high
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The Five-Forces Model
• Bargaining power of consumers
• Customers being concentrated or buying in
volume affects intensity of competition
• Consumer power is higher where products are
standard or undifferentiated
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Conditions Where Consumers Gain Bargaining Power
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The Five-Forces Model
• Potential development of substitute products
• Pressure increases when:
• Prices of substitutes decrease
• Consumers’ switching costs decrease
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The Five-Forces Model
• Rivalry among competing firms
• Most powerful of the five forces
• Focus on competitive advantage of strategies
over other firms
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The Five-Forces Model
TABLE 1. Conditions That Cause High Rivalry Among Competing Firms
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Forecasting Tools and Techniques
• Forecasts
• educated assumptions about future trends and events
• quantitative, qualitative techniques
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Making Assumptions
• Assumptions
• Estimates of the impact of major external factors, over
which the manager has little if any control, but which may
exert a significant impact on performance or the ability to
achieve desired results.
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Industry Analysis: The External Factor Evaluation
(EFE) Matrix
• Political & Governmental
• Economic
• Social, Cultural, Demographic
• Technological
• Environmental
• Legal
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EFE Matrix Steps
1. List key external factors
2. Weight from 0 to 1
3. Rate effectiveness of current strategies
4. Multiply weight * rating
5. Sum weighted scores
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EFE Matrix for a Local Ten-Theater Cinema Complex
Opportunities___________________________________________________________________________
1. Rowan County is growing 8 percent annually in population 0.05 3 0.15
2. TDB University is expanding 6 percent annually 0.08 4 0.32
3. Major competitor across town recently ceased operations 0.08 3 0.24
4. Demand for going to cinema growing 10 percent annually 0.07 2 0.14
5. Two new neighborhoods being developed within 3 miles 0.09 1 0.09
6. Disposable income among citizens grew 5 percent in prior year 0.06 3 0.18
7. Unemployment rate in county declined to 3.1 percent 0.03 2 0.06
Threats________________________________________________________________________________
8. Trend toward healthy eating eroding concession sales 0.12 4 0.48
9. Demand for online movies and DVDs growing 10 percent annually 0.06 2 0.12
10. Commercial property adjacent to cinemas for sale 0.06 3 0.18
11. TDB University installing an on-campus movie theater 0.04 3 0.12
12. County and city property taxes increasing 25 percent this year 0.08 2 0.16
13. Local religious groups object to R-rated movies being shown 0.04 3 0.12
14. Movies rented from local Blockbuster store up 12 percent 0.08 2 0.16
15. Movies rented last quarter from Time Warner up 15 percent 0.06 1 0.06
Total 1.00 2.58
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Industry Analysis: Competitive Profile Matrix
(CPM)
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Example: Competitive Profile Matrix
TABLE 3. Example of a Competitive Profile Matrix
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Company 1 Company 2 Company 3____________
Critical Success
Factors_ ___ _ Weight Rating Score Rating Score Rating Score____ ____
Advertising 0.20 1 0.20 4 0.80 3 0.60
Product Quality 0.10 4 0.40 3 0.30 2 0.20
Price Competitiveness 0.10 3 0.30 2 0.20 1 0.10
Management 0.10 4 0.40 3 0.20 1 0.10
Financial Position 0.15 4 0.60 2 0.30 3 0.45
Customer Loyalty 0.10 4 0.40 3 0.30 2 0.20
Global Expansion 0.20 4 0.80 1 0.20 2 0.40
Market Share 0.05 1 0.05 4 0.20 3 0.15
Total 1.00 3.15 2.50 2.20
Note: The ratings values are as follows: 1 = major weakness, 2 = minor weakness, 3 = minor strength, 4 =
major strength. As indicated by the total weighted score of 2.50, Competitor 2 is weakest. Only eight
critical success factors are included for simplicity; this is too few in actuality.
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