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What is Porters Five Forces analysis?

Porter’s Five Forces analysis is a framework that helps analyse the level of competition within a certain industry.

Why is it an important Best Practice?

Porters Five Forces model is an important tool used in a strategic analysis to analyze the competitiveness in an industry. This model helps company understand the risks in the industry it is operating in and decide how it wants to execute its strategies in response to competition. It is especially useful when starting a new business or when entering a new industry sector.

According to this framework, competitiveness does not only come from competitors. Rather, the state of competition in an industry depends on five basic forces: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products or services, and existing industry rivalry. The collective strength of these forces determines the profit potential of an industry and thus its attractiveness. If the five forces are intense (e.g. airline industry), almost no company in the industry earns attractive returns on investments. If the forces are mild however (e.g. softdrink industry), there is room for higher returns.

List of Potential Porter’s Five Forces factors:

Threat of new entrants

• Economies of scale
• Product differentiation
• Brand identity/loyalty
• Access to distribution channels
• Capital requirements
• Access to latest technology
• Access to necessary inputs
• Absolute cost advantages
• Experience and learning effects
• Government policies
• Switching costs
• Expected retaliation from existing players

Bargaining power of suppliers

• Number of suppliers
• Size of suppliers
• Supplier concentration
• Availability of substitutes for the supplier’s products
• Uniqueness of supplier’s products or services (differentiation)
• Switching cost for supplier’s products
• Supplier’s threat of forward integration
• Industry threat of backward integration
• Supplier’s contribution to quality or service of the industry products
• Importance of volume to supplier
• Total industry cost contributed by suppliers

Importance of the industry to supplier’s profit

• Bargaining power of buyers
• Buyer volume (number of customers)
• Size of each buyer’s order
• Buyer concentration
• Buyer’s ability to substitute
• Buyer’s switching costs
• Buyer’s information availability
• Buyer’s threat of backward integration
• Industry threat of forward integration
• Price sensitivity

Threat of substitute products or services

• Number of substitute products available
• Buyer’s propensity to substitute
• Relative price performance of substitutes
• Perceived level of product differentiation

• Switching costs

• Substitute producer’s profitability & aggressiveness

Rivalry among existing competitors

• Number of competitors
• Diversity of competitors
• Industry concentration and balance
• Industry growth
• Industry life cycle
• Quality differences
• Product differentiation
• Brand identity/loyalty
• Switching costs
• Intermittent overcapacity
• Informational complexity
• Barriers to exit
• Substitute producer’s profitability & aggressiveness

Rivalry among existing competitors

• Number of competitors
• Diversity of competitors
• Industry concentration and balance
• Industry growth
• Industry life cycle
• Quality differences
• Product differentiation
• Brand identity/loyalty
• Switching costs
• Intermittent overcapacity
• Informational complexity
• Barriers to exit