Competitive Strategy: Porter's Five Forces

Overview

• Developed by Michael E. Porter from Harvard University in the late 1970s
• Part of modern competitive strategy thinking
• Three models:
  1. Five Forces Model (today's lecture)
  2. The Value Chain (next lecture)
  3. Generic Strategies (last lecture of the week)

Core Concept

• Industry Rivalry: The intensity of competition within the industry.
  • Example: McDonald’s competing with other fast-food chains like Burger King, Wendy’s, In-N-Out, etc.
  • Strategies: High quality, low cost, fast service

Porter's Five Forces

1. Threat of New Entrants
   • Cost and difficulty of entering the industry
   • Example: Few companies enter the fast-food industry due to high costs.
2. Threat of Substitute Products
   • Availability of alternatives
   • Example: Alternatives to McDonald's (other food places like Panera Bread, Pizza places)
3. Bargaining Power of Buyers
   • Choices available to consumers; they can easily switch
   • Example: Consumers can opt for different fast-food joints if not satisfied
4. Bargaining Power of Suppliers
   • Dependence on suppliers; uniqueness of suppliers
   • Example: Limited sources of beef for McDonald's equal high bargaining power of suppliers, but many uniform suppliers equal low power
5. Government Regulation (Not originally part of Porter’s model)
   • Acts as a sixth force influencing the industry

Additional Terms

• Entry Barriers
  • Measures to make market entry unattractive for newcomers
  • Example: Southern California Edison’s infrastructural needs deter new entrants
• Switching Costs
  • Costs that prevent customers from switching to substitutes
  • Strategies: Memberships, contracts, loyalty programs

Industry Examples

1. Cellphone Industry
   • Intra-industry Rivalry: Highly competitive (pricing, features)
   • Threat of New Entrants: Low (high capital requirements)
   • Threat of Substitutes: Low (landlines, Skype, etc. are not equally flexible)
   • Bargaining Power of Buyers: High (easy switching)
   • Bargaining Power of Suppliers: Low (many suppliers of parts)
2. Self-Help App Market (Quit Smoking)
   • Intra-industry Rivalry: High (many apps available)
   • Threat of New Entrants: High (easy to develop an app)
   • Threat of Substitutes: Low (convenience of apps vs. other methods)
   • Bargaining Power of Buyers: Super high (many free apps)
   • Bargaining Power of Suppliers: Low (many programmers available)