Porter’s 5 Forces

The intensity of competition in an industry is rooted in its underlying economic structure and goes well beyond the behavior of current competitors. The state of competition depends on five basic competitive forces shown below. These factors affect the elasticity of the demand curve, though some effect the long run vs. the short run. That is, potential entrants affect the long run demand curve in that they may change the industry structure from being more like an oligopoly versus perfect competition

  1. Threat of new entrants
  2. Bargaining power of buyers
  3. Threat of substitute products of services
  4. Bargaining power of suppliers
  5. Rivalry among existing firms

Threat of entry

Barriers of entry

  1. economies of scale
  2. product differentiation
  3. capital requirements
  4. switching costs
  5. access to distribution channels
  6. cost disadvantages independent of scales

favorable access to raw materials
favorable locations
government subsidies
learning curve

    g.  government policy

Intensity of rivalry among existing competitors

  1. numerous or equally balanced competitors
  2. slow industry growth
  3. high fixed or storage costs
  4. lack of differentiation or switching costs
  5. capacity augmented in large increments
  6. diverse competitors
  7. high strategic states
  8. high exit barriers

Bargaining power of buyers

  1. Buyer purchases large volumes relative to the seller sales
  2. Buyer purchases are a significant portion of the buyer’s total costs
  3. The product it purchases from the industry are standard or undifferentiated
  4. Face few switching costs
  5. Product is unimportant to the quality of the buyers’ products or services
  6. Buyer has full information

Supplier power

  1. few suppliers
  2. not obliged to contend with other substituted products
  3. industry is not an important customer of the supplier group
  4. suppliers product is an important input to the buyers business
  5. the supplier groups products are differentiated or it has built up switching costs
  6. the supplier group poses a credible threat of forward integration

Three Generic Strategies

  1. Overall cost leadership
  2. Differentiation
  3. Focus