Porter’s 5 Forces Model

Michael Porter, in his seminal book “Competitive Advantage”, lists a series of 78 questions that allow you to assess the following 5 competitive forces in a factual manner:

- Threat of new entrants
- Supplier bargaining power
- Clients’ bargaining power
- Threat of substitutes
- Rivalry

To help you in your understanding of this essential tool of competition analysis, we propose you to go through the online course we have dedicated to it.

Transcript

1. • Econometric analysis
   • The different dimensions
   of the economic sector
   allow the analysis of its
   strategic importance
   • Each sector is under
   pressure from both
   suppliers and customers
   PORTER’S Five Forces
   Framework
   2
   Crédits photos : Shutterstock
   

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2. • Variable pressures that
   exacerbate intra-sectoral
   competitive struggle
   • My favourite ☺ because it
   is easily applicable to
   SMEs in the context of
   market research
   PORTER’S Five Forces
   Framework
   2
   Crédits photos : Shutterstock
   

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3. PORTER’S Five Forces Framework
   

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4. • Indicator of the intensity of the
   internal competitive struggle in
   the sector analysed.
   • Sub -dimensions :
   - Relative concentration:
   concentration ↑ = bargaining
   power ↑ = the ability to exert
   pressure on the other.
   Bargaining power of suppliers
   2
   

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5. • Related quality: the value of
   the final product is strongly
   determined by the quality of
   what is purchased from the
   supplier (example: passenger
   aircraft and engines RR,
   Snecma).
   • Product differentiation: it
   makes it very difficult to
   substitute one product for
   another and gives the supplier
   power over his customer.
   Bargaining power of suppliers
   2
   

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6. • Cost of transfer
   • Integration possibilities: those
   downstream with an acceptable
   cost give the supplier significant
   bargaining power concerning his
   partner.
   • Distribution of the added value:
   precise knowledge of the partner's
   costs and earnings pressures from
   the one with the highest added
   value (example: suppliers to the
   supermarket sector)
   • The protection of public
   authorities
   Bargaining power of suppliers
   2
   

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7. • Relative concentration
   • Related quality: important if
   the value of the final product is
   not determined by the quality
   of what is purchased from the
   supplier
   • Banalisation of products:
   easy substitution
   Bargaining power of customers
   2
   

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8. • Transfer cost: low transfer
   cost = higher power
   • Integration possibilities:
   negotiating power with its
   partner but barriers to entry
   Example: Casino (distributor
   → innovator), Swatch (vertical
   integration)
   • Distribution of added value
   • Protection by the public
   authorities towards the
   customer
   Bargaining power of customers
   2
   

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9. Assessment factors
   • Number and size of
   competitors that give a first
   indication of the nature of the
   competitive structure
   • Growth in the activity that
   weighs on the market (low
   growth accentuates tensions)
   • The importance of fixed or
   storage costs leads to a
   negative impact on the
   profitability of smaller
   companies
   a rivalry between existing
   competitors
   2
   

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10. • Product neutrality or low
    transfer costs that exacerbate
    intra-sectoral control
    • The diversity of competitors
    makes it difficult to perceive
    the most dangerous
    competitors
    • Importance of strategic
    issues
    • The existence of high
    obstructions at the exit
    a rivalry between existing
    competitors
    2
    

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11. • A company is likely to become
    a new entrant if it has an
    interest in:
    - Integration
    - A growing market
    - Profitability
    • Two assessment factors:
    - Barriers to entry (economies of
    scale and scope, product
    differentiation, need for capital
    - Fear of retaliation
    Threat of new entrants
    2
    

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12. • Depends on technological
    developments (DVD, MP3,
    floppy disk)
    • To anticipate the threat :
    - Be familiar with the functional
    use
    - Monitor emerging technologies
    Threat of substitutes
    2
    

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13. • The regulation of competition
    and the limitation of violations
    • The amplifying role of other
    forces
    The role of public authorities
    (the 6th force)
    2
    

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