Michael Porter's Five Forces Framework

Overview

• Purpose: Analyze external forces influencing a firm's profitability
• Industry Definition: A group of firms producing products/services that are close substitutes
• Impact: Industry structure critically affects firm profitability

Industry Profitability Examples (1992-2006)

• Soft Drinks: 37.6% annual returns due to strong brand names and low competition
• Pharmaceuticals: 31% annual returns; protected by patents and limited competition
• Airlines: Low profits due to high competition and low differentiation

The Five Forces

1. Threat of Buyers

• High Buyer Power: Few buyers or undifferentiated products with low switching costs
• Example: Walmart as a buyer for generic denim, high threat due to size and undifferentiation

2. Threat of Suppliers

• High Supplier Power: Concentrated supplier industry, unique products, high switching costs
• Example: Intel as a supplier to IBM, high power due to market dominance

3. Threat of New Entrants

• Barriers to Entry: High barriers protect incumbents; examples include economies of scale, regulations, brand strength
• Example: Procter & Gamble uses brand strength and economies of scale to deter new entrants

4. Threat of Substitutes

• Substitute Products: Products from outside the industry fulfilling needs differently
• Example: Butter vs. I Can't Believe It's Not Butter

5. Threat of Rivalry

• High Rivalry Conditions: Numerous firms, slow growth, undifferentiated products
• Example: Farming industry is high rivalry due to standardized products

Application to Denim Jeans

Supplier Power

• Cotton Suppliers: Low threat due to many suppliers of a standardized product

Buyer Power

• Retail Concentration: High threat from large retailers like Walmart, Target, Amazon, H&M

Barriers to Entry

• Generic Brands: Low barriers, leading to high entry and threat to profits

Substitute Products

• Alternatives to Denim: Many substitutes like joggers, chinos, capris lead to high threat

Rivalry

• Competition: High rivalry with many generic and branded options

Conclusion

• Denim industry presents high threats to profitability due to buyer power, low barriers, substitutes, and rivalry
• Only supplier power is favorable

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Final Notes

• Check out additional videos in the "Intro to Strategy" series
• Engage by liking and commenting on the video

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