3.1.4. Porter's Five Forces
Porter’s Five Forces framework was developed by Harvard's Michael Porter using concepts from industrial organization economics to analyze five interacting factors critical for an industry to become and remain competitive: industry competition, threat of new entrants, threat of substitutes, bargaining power of buyers and bargaining power of suppliers.
Each of these forces has several determinants.
- The intensity of industry competition: number of competitors, rate of industry growth, industry overcapacity , exit barriers, diversity of competitors, informational complexity and asymmetry, brand equity, fixed cost allocation per value added, protection against imports, government policies to support/hinder competition or monopolices, coordination within the industry participants.
- The bargaining power of buyers: buyer volume , buyer switching costs relative to firm switching costs, buyer information availability, availability of existing substitute products, buyer price sensitivity, price of total purchase, consumer protection laws.
- The bargaining power of suppliers: degree of differentiation of inputs, presence of substitute inputs, supplier concentration to firm concentration ratio, cost of inputs relative to selling price of the product, importance of volume to supplier, existing laws and regulations to protect local suppliers.
- The threat of new entrants: the existence of barriers to entry, economies of product differences, brand equity, capital requirements, access to distribution, absolute cost advantages, learning curve advantages, government policies.
- The threat of substitute products: buyer propensity to substitute, relative price performance of substitutes, buyer switching costs, perceived level of product differentiation.