Overview
This lecture explains Porter’s Five Forces model, describing how it analyzes industry competitiveness and helping businesses understand the factors affecting profitability and strategy.
Introduction to Porter's Five Forces
- Porter's Five Forces is a framework for analyzing the competitiveness of a market or industry.
- The five forces are: competitive rivalry, threat of new entrants, supplier power, customer power, and threat of substitutes.
- The model helps businesses assess competition intensity and potential profitability.
- Porter broadened the concept of competition beyond immediate rivals to include suppliers and buyers.
The Five Forces Explained
1. Competitive Rivalry
- High rivalry exists when many firms compete, products are similar, or exit barriers and fixed costs are high.
- Intense competition leads to price wars, reduced profits, and increased marketing costs.
2. Threat of New Entrants
- Industries with low entry barriers face more competition and lower profits.
- Barriers include economies of scale, product differentiation, capital requirements, distribution access, regulations, and customer switching costs.
3. Supplier Power
- Suppliers have more power when they are few, offer unique products, or when switching suppliers is costly.
- Supplier power increases when they can integrate forward into the buyer's industry.
4. Customer Power
- Fewer buyers or large purchases give customers more bargaining power.
- Power grows when switching costs are low, buyers are price sensitive, or well-informed.
5. Threat of Substitutes
- Substitutes threaten an industry when alternatives are readily available, affordable, and offer similar performance.
- High threat if customers are willing and able to switch easily.
Applying Porter's Model
- Steps: define industry, identify key players, assess strengths, analyze structure, evaluate forces, and note controllable factors.
- The five forces’ strength determines whether industry competition is intense (low profits) or mild (high profits).
Critiques of the Model
- The model may overlook individual company strengths and the impact of inter-industry overlap.
- It underemphasizes collaboration and is less effective for rapidly evolving industries.
- Assumes static, clearly defined industries, which doesn’t always fit modern markets.
Comparison to Other Models
- Porter’s Five Forces focuses on industry competition, while SWOT analysis looks at internal strengths/weaknesses and external opportunities/threats.
Example Applications
- Globalization increases competition by lowering entry barriers and changing supplier/customer dynamics.
- In AI, the model examines rivalry, supplier power from data/hardware providers, entry barriers, and substitution threats.
Key Terms & Definitions
- Porter's Five Forces — A framework for analyzing industry competitiveness.
- Competitive Rivalry — The intensity of competition among existing firms.
- Threat of New Entrants — The likelihood and impact of new companies entering the industry.
- Supplier Power — The ability of suppliers to influence price and terms.
- Customer Power — The influence customers have on price and product quality.
- Threat of Substitutes — The risk posed by alternative products or services.
Action Items / Next Steps
- Review industry structure using the six-step Porter analysis process.
- Consider the five forces when preparing business strategies or case studies.
- Read more on critiques and application in fast-changing sectors.