Porters Five Forces Model

Porters Five Forces Model

Developed by Michael Porter in 1979/1980 Considered a classic industry analysis tool Provides a framework for perspective on multiple competitive factors affecting your company and industry Five basic competitive forces whose collective strength determines the long-run profit potential of an industry

Porters Five Forces Model

Porters Five Forces model is a useful generic structure for thinking about the nature of industries. The definition of an industry is as follows: The group of firms producing products that are close substitutes for each other Michael Porter
Competitive Strategy

The Five Forces

Threat of New Entrants/ Barriers to Entry

Bargaining Power of Suppliers

Rivalry Among Existing Competitors

Bargaining Power of Customers

Threat of Substitutes

APPLICATION

Sources for this section: Michael E. Porter, Understanding Industry Structure, Revised 2007 and How Competitive Forces Shape Strategy, Harvard Business Review, 1979

Rivalry Among Existing Competitors

Rivalry determined by number of firms, relative size, degree of differentiation between firms, demand conditions and barriers to exit Competition among rivals is greatest when:

There are many competitors, nearly equal in size or power Slow industry growth High barriers to exit

Rivalry Among Existing Competitors

Industry competition is based on price when:

There is low differentiation and/or low switching costs between competitors Fixed costs are high, but marginal costs are low Capacity must be expanded in large increments, disrupting the supply and demand balance The product is perishable (groceries, airline seats, information)

Threat of New Entrants/Barriers to Entry

Threat of potential entrants determined by:

Attractiveness of industry Height of entry barriers (e.g., start-up costs, brand loyalty, regulation, etc.)

Customer switching costs (high fixed costs involved in switching to another supplier) Capital requirements (e.g., very high in gas exploration) Incumbency advantages independent of size (e.g., proprietary technology, patents) Unequal access to distribution channels (how much have existing competitors tied up distribution channels) Restrictive government policy

Threat of New Entrants/Barriers to Entry

large capital requirements or the need to gain economies of scale quickly.

strong customer loyalty or strong brand preferences.

lack of adequate distribution channels or access to raw materials.

Bargaining Power of Suppliers

Strength of suppliers determined by:

Number of suppliers and their degree of differentiation Portion of a firms inputs obtained from a particular supplier Portion of a suppliers sales sold to a particular firm Switching costs Potential for Vertical Integration

Bargaining Power of Suppliers

A supplier group is powerful if:

It is more concentrated than the industry it sells to (e.g., Microsoft: near-monopoly in operating systems, with fragmentation among PC-making customers) Industry participants face high switching costs when changing suppliers Differentiated products offered by suppliers No substitutes for what the supplier group offers Supplier group does not depend heavily on a particular industry

Power of Customers/Buyers

Power of customers determined by:

Number of buyers Firms degree of differentiation Portion of a firms inputs sold to a particular buyer Portion of a buyers purchases bought from a particular firm Switching costs Potential for vertical integration

Threat of Substitutes

A substitute performs the same function as an industrys product or service, but by a different means

Determined by the number of potential substitutes, their closeness in function and relative price Not just another product: sometimes the substitute is to do without the product or to do it themselves

Long distance phone service providers vs. VoIP providers (Skype and Vonage) Mobile phone as primary phone vs. landline

Smart Phones Industry

Automotive Industry

Oil Industry

Media Industry

http://www.strategicmanagementinsight.com/topics/vertical-integration.html

Application of Porters Five Forces Model - SmartPhones

Background of Smartphones

Simon designed by IBM in 1992 Palm started the concept/evolved from PDAs (nonwireless context) Advanced productivity tools (calendars, emails, etc.) High cost/high end devices Look and feel of a mini PC Perceived sense of increased efficiency Ability to expand and add-on to augment the user experience Started primarily for business- expanded to consumers/entertainment

Smartphone Competitors

Smartphone Definition:

Competitors:

Many functions other than a regular cellular phone Mini computer inside a normal cell phone Can upload applications Revolutionary phone, media flare and internet access

RIM Apple LG Samsung Motorola HTC Nokia

Operating systems:

Apple Android Microsoft Windows Phone 7 Facebook?

Threat of New Entrants/Barriers to Entry

Knowledge barrier
Brand recognition Carrier relationship

Highly fragmented
Exclusive technology? Operating system: high barrier to entry/open source?

Device: lower manufacturing barriers to entry

Power of Suppliers

Who are they:

Chip mfrs, circuit boards, cameras, touch screen (raw materials) - mixed Carriers traditionally carriers had power; Apple now has changed this Distribution channels carrier store, big box retailer carriers primarily Software/operating system shifting toward OS?

Power of Customers

Who are they:

Consumer power on a group/demographic level; trend seekers Enterprise can choose device; longer term view Carriers very powerful

Threat of Substitutes

Email Skype/Gizmo/VoIP iPad notebook/computer Regular old cell phone Landlines Visit in person No mobile device

Rivalry Among Existing Competitors

Huge Very fast moving/phones becoming obsolete

Conclusions

Very strong, but lots of competition Quickly changing Innovation is key Huge opportunity for growth upside Carrier dependent

Recommendations

Form good relationship with carrier Innovate Operating system Dont forget voice

5 Forces

Analysis (Modern Retail / Banking Industry / BPO/Automobile)

Rivalry among the competitor

Threat of entrants

Bargaining power of supplier

Bargaining power of buyers

Threat of substitutes