Five Forces Industry Analysis - PowerPoint PPT Presentation

Five Forces Industry Analysis

Nicole Fiamingo

• Developed by Michael Porter
• Provides an understanding of an industry and its participants
• Used as a means to decrease the gap between a firm’s external environment and its internal resources

• Identify the profit potential of an industry
• Identify the forces that would harm your company’s profitability in that industry
• Protect and extend your competitive advantage
• Anticipate changes in industry structure

• Threat of new entrants
• Bargaining power of suppliers
• Bargaining power of buyers
• Threat of substitute products or services
• Degree of rivalry among existing competitors

• Entry-deterring price
• Incumbent retaliation
• High entry costs
• Experience effects
• Other cost advantages
• Product differentiation
• Distribution access
• Government restrictions
• Switching costs

New entrants usually face several barriers to entry, including:

Suppliers bargaining power may be influenced by:

• Concentration
• Diversification
• Switching costs
• Organization
• Government

Buyer’s Bargaining power my be influenced by:

• Differentiation
• Concentration
• Profitability
• Quality

Market displacement by existing/potential substitutes can be influenced by:

• Relative price/performance trade off
• Switching costs
• Profitability

The intensity of competition within an industry is determined by:

• Market Growth
• Cost Structure
• Barriers to exit
• Product switching
• Diversity

• Forecast future changes in each of the five forces
• Discover how these changes will affect the other forces
• Discover how the interrelated changes will affect the future profitability of the industry
• Discover how you might change the strategy to exploit the changing industry structure

• Underestimates the capabilities that may serve as the company’s competitive advantage in the long-term
• Does not take into account the synergies and interdependence within a corporation’s overall portfolio
• Strict interpretations ignore social & political factors
• Does not address why or how companies are able to get advantageous positions

Step 1: Collect Information

• Identify your industry
• Look at existing demand & supply patterns
• Identify the characteristics of each of the five forces
• Examine & assess their impact on the industry

Main Sources of Competitive Pressures

• Rivalry among competitors
• Threat of substitute products
• Threat of potential entry
• Bargaining power of suppliers
• Bargaining power of buyers

Step 2: Assess & Evaluate

• Determine the direction of the force
• Give each force a value indicating if it is strong, moderate, or weak.
• Scale of 1 – 5, with 1 being the weakest
• The ultimate goal: To identify the ability of your company to successfully compete within its industry, given the collective strength of the five forces

Step 3: Develop Strategy

• Repeat the first two steps in light of industry change and evolution
• Long-term industry trends should be analyzed to determine whether the profitability of the industry is sustainable and how this will affect your company’s competitive position.

• Understanding how an industry will evolve provides important direction for selecting and managing strategy around these five criteria
• Not all industries are alike-for companies with product portfolios across numerous industries, this technique should be repeated for each industry