The Five Forces - Institute For Strategy And Competitiveness

Overview

• The Five Forces framework helps understand competitive forces in an industry.
• Developed by Michael Porter in 1979, it continues to shape business strategy and academic thought.
• Aids in assessing industry attractiveness, trends, competition, and strategic positioning.

The Five Forces

1. Threat of New Entrants

• New entrants can force current players to lower prices and increase spending to retain customers.
• Entry introduces new capacity, impacting prices and costs, thus capping industry profit potential.
• Depends on barriers like economies of scale, brand awareness, distribution access, and government restrictions.
• Threat rises if established companies from other regions are potential entrants.

2. Bargaining Power of Suppliers

• Industry players purchase inputs from suppliers which affect cost proportions.
• Powerful suppliers can charge higher prices or demand favorable terms, lowering industry profitability.
• Supplier power increases with fewer suppliers or high switching costs.

3. Bargaining Power of Buyers

• Powerful buyers can negotiate lower prices or demand additional services, capturing more value.
• Buyer power is high when buyers are large, products are undifferentiated, and switching costs are low.
• Multiple buyer segments may exist with varying power levels.

4. Threat of Substitute Products or Services

• Substitutes meet the same need differently (e.g., videoconferencing vs. travel).
• High threat if substitutes offer better price-performance and low switching costs.

5. Rivalry Among Existing Competitors

• Intense rivalry reduces prices or profits by increasing competition costs.
• Fierce rivalry occurs with:
  • Numerous or equally sized competitors
  • Slow industry growth
  • High fixed costs
  • High exit barriers
  • Strong commitment to the business
  • Diverse competitive approaches or goals

Key Concepts

• Every industry has unique characteristics, but profitability drivers are consistent.
• Industry structure and a company’s position within it are key profitability drivers.
• Analyzing the Five Forces helps anticipate competition shifts, shape industry structure, and find better strategic positions.

Dynamic Industry Structure

• Industry structures change over time and are dynamic, not static.
• Changes can come from shifting buyer/supplier power, technological/managerial innovation, regulatory changes, or competitive choices.
• Five Forces analysis is crucial to adapt to and exploit industry structural changes.