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
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
3. PORTER’S Five Forces Framework
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
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
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
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
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
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
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
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
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
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