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Porter’s 5 Forces Model

IntoTheMinds
March 18, 2021

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.

IntoTheMinds

March 18, 2021
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  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

    View Slide

  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

    View Slide