Presentation Tips:  Porter 5 Forces Analysis

I have personally been using the Porter 5 Forces framework to do industry analysis for over ten years.  The Porter 5 Forces framework was developed by Michael E. Porter of Harvard Business School in 1979.  Porter 5 Forces analysis is an excellent framework that could help managers, entrepreneurs and investors to evaluate whether a business is operating in a profitable industry.  From the results of this analysis, strategies could be formulated to help companies identify opportunities and avoid threats.

Here is a Porter 5 Forces framework:

Source: page 40, Strategic Management An integrated
Approach written by Charles W. L. Hill and Gareth R. Jones

Each force in this framework could be categorized as strong, medium, or weak.  Strong forces are perceived as threats to the enterprise.  Strong forces have strong bargaining power thus limit the enterprise’s ability to increase price or lower cost.  On the other hand, weak forces are perceived as opportunities.  Weak forces have low bargaining power thus the enterprise could increase price or lower cost to sustain more profit.

Here is a list of the five forces.  Answer the questions on the right-hand column and you will be able identify whether the forces should be categorized as opportunities or threats.

The five forces in this framework include the followings:

Potential Competitors/ Barrier of Entry (Companies currently not competing in the industry but have the necessary resources to do so)

How loyal are the end users in this industry? How troublesome or hard is it for the end users to switch and use another product? Does it require a large seed capital to enter this industry? Do entries to this industry regulated by government? How hard is it to gain access to the distribution channels? How long does it take for new staff to acquire the necessary skills to do the work?

 

Threat of Substitutes (Products in another industry that satisfy similar needs)

How many close substitutes are available? How pricy are the substitutes? What is the perceived quality of the substitutes?

 

Intensity of rivalry among established firms (Direct competitors competing for market share)

How many close competitors exist in the industry? What are the sizes of your close competitors? What is the industry structure? Is it a fragmented, consolidated, oligopoly or monopoly industry? What is the current industry growth rate? How high are the exit barriers? Do your competitors have a high committed fixed cost thus they have to operate even at a loss? How diversified are your competitors? How extensively do your direct competitors advertise?

 

Bargaining power of buyers (Customers)

How large are your buyers’ company? How many companies are there for the buyer to choose from? Are the buyers buying a huge volume? Do you depend only on a few buyers to sustain your sales? How hard is it for the buyers to switch and use a competing product? Are the buyers purchasing from you as well as your competitors? Do the buyers have the capacity to enter your business and produce the goods themselves?

 

Bargaining power of suppliers

Are there substitutes for your suppliers’ products? Do your suppliers serve multiple industries? Does the total industry revenue accounting for only a small portion of the supplier’s total revenue? Do you have high switching cost to use another supplier? Do suppliers have the capacity to enter your business? Does your company capable to enter the supplier’s business?

 

After analyzing each force individually, the next step is to interrupt the results of this framework as a whole.  For example, if you have strong suppliers that are raising their prices, are you able to shift the cost to your customers? Do you have a weak buyer?  You can also formulate strategies according to the results to change your situation.  For instance, you can integrate backward and stop buying from your suppliers.  You can also launch your own retailers and sell your own goods through your own distribution channels.  Depending on your own situation, try to formulate the right strategies to increase your bargaining power against the five forces.

Source & More Reading

http://en.wikipedia.org/wiki/Porter_5_forces_analysis
http://www.quickmba.com/strategy/porter.shtml
http://www.coursework4you.co.uk/porter.htm
http://www.mindtools.com/pages/article/newTMC_08.htm

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