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)

• First published 1979. Now a strategy textbook staple. 2008 Harvard

Business Review article reaffirms its lasting value, though there have
been critics….

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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

• E.g., entry ease/barriers, geographical factors, incumbents

resistance, new entrant strategy

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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

• E.g., brand reputation, geographical coverage,

product/service level quality, relationships with
customers, bidding processes/capabilities

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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

• E.g., buyer choice, buyers size/number, change

cost/frequency, product/service importance,
volumes

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Conditions Where Consumers Gain Bargaining Power

1. If buyers can inexpensively switch

2. If buyers are particularly important
3. If sellers are struggling in the face of falling
consumer demand
4. If buyers are informed about sellers’ products,
prices, and costs
5. If buyers have discretion in whether and when
they purchase the product

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The Five-Forces Model
• Potential development of substitute products
• Pressure increases when:
• Prices of substitutes decrease
• Consumers’ switching costs decrease

• E.g., alternatives price/quality, market distribution

changes, fashion and trends, legislative effects

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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

• E.g., number and size of firms, industry size and

trends, product/service ranges, differentiation

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The Five-Forces Model
TABLE 1. Conditions That Cause High Rivalry Among Competing Firms
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▬

1. High number of competing firms

2. Similar size of firms competing
3. Similar capability of firms competing
4. Falling demand for the industry’s products
5. Falling product or service prices in the industry
6. When consumers can switch brands easily
7. When barriers to entering the market are low
8. When the product is perishable
9. When consumer demand is falling
10. When rivals have excess inventory
11. When rivals sell similar products/services
12. When mergers are common in the industry

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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

TABLE 2. EFE Matrix for a Local 10-Theater Cinema Complex

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Key External Factors Weight Rating Weighted Score

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)

• Identifies firm’s major competitors and their strengths &

weaknesses in relation to a sample firm’s strategic positions
• Critical success factors include internal and external issues

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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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