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PORTER 5 FORCES PDF

Monday, June 3, 2019


Michael Eugene Porter (born May 23, )[2] is the. Bishop William Lawrence University Professor at The Insti- tute for Strategy and Competitiveness, based at . The threat of entry is low when the barriers to entry are high and vice versa. The main barriers to entry are: Economies of scale/high fixed costs. Experience and. young economist and associate professor, Michael E. Porter. “Porter's five forces” have shaped a generation of academic research and business practice.


Porter 5 Forces Pdf

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5. Critique. 1 Introduction. The model of the Five Competitive Forces was developed by Michael E. Porter in his book. „Competitive Strategy: Techniques for. Awareness of these forces can help a company stake out a position in its industry that is less vulnerable to attack. Michael E. Porter . 5. Access to distribution channels. The newcomer on the block must, of course, secure distribution of its. “Porter's five forces” have shaped a generation of academic research and business practice. With prodding and assistance from Harvard Business.

For example, what makes the industry vulnerable to entry, What determines the bargaining power of suppliers? Knowledge of these underlying sources of competitive pressure provides the groundwork for a strategic agenda of action.

They highlight the critical strengths and weaknesses of the company, animate the positioning of the company in its industry, clarify the areas where strategic changes may yield the greatest payoff, and highlight the places where industry trends promise to hold the greatest significance as either opportunities or threats. Understanding these sources also proves to be of help in considering areas for diversification. Contending Forces The strongest competitive force or forces determine the profitability of an industry and so are of greatest importance in strategy formulation.

For example, even a company with a strong position in an industry unthreatened by potential entrants will earn low returns if it faces a superior or a lower-cost substitute product—as the leading manufacturers of vacuum tubes and coffee percolators have learned to their sorrow.

In such a situation, coping with the substitute product becomes the number one strategic priority. Different forces take on prominence, of course, in shaping competition in each industry. In the ocean-going tanker industry the key force is probably the downloaders the major oil companies , while in tires it is powerful OEM downloaders coupled with tough competitors.

In the steel industry the key forces are foreign competitors and substitute materials. Every industry has an underlying structure, or a set of fundamental economic and technical characteristics, that gives rise to these competitive forces.

This view of competition pertains equally to industries dealing in services and to those selling products.

A few characteristics are critical to the strength of each competitive force. I shall discuss them in this section. Threat of entry New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources.

Companies diversifying through acquisition into the industry from other markets often leverage their resources to cause a shake-up, as Philip Morris did with Miller beer. The seriousness of the threat of entry depends on the barriers present and on the reaction from existing competitors that entrants can expect. If barriers to entry are high and newcomers can expect sharp retaliation from the entrenched competitors, obviously the newcomers will not pose a serious threat of entering.

There are six major sources of barriers to entry: 1. Economies of scale These economies deter entry by forcing the aspirant either to come in on a large scale or to accept a cost disadvantage. Scale economies in production, research, marketing, and service are probably the key barriers to entry in the mainframe computer industry, as Xerox and GE sadly discovered.

Economies of scale can also act as hurdles in distribution, utilization of the sales force, financing, and nearly any other part of a business. Product differentiation Brand identification creates a barrier by forcing entrants to spend heavily to overcome customer loyalty. Advertising, customer service, being first in the industry, and product differences are among the factors fostering brand identification. It is perhaps the most important entry barrier in soft drinks, over-the-counter drugs, cosmetics, investment banking, and public accounting.

To create high fences around their businesses, brewers couple brand identification with economies of scale in production, distribution, and marketing. Capital is necessary not only for fixed facilities but also for customer credit, inventories, and absorbing start-up losses. While major corporations have the financial resources to invade almost any industry, the huge capital requirements in certain fields, such as computer manufacturing and mineral extraction, limit the pool of likely entrants.

Cost disadvantages independent of size Entrenched companies may have cost advantages not available to potential rivals, no matter what their size and attainable economies of scale. These advantages can stem from the effects of the learning curve and of its first cousin, the experience curve , proprietary technology, access to the best raw materials sources, assets downloadd at preinflation prices, government subsidies, or favorable locations.

Sometimes cost advantages are legally enforceable, as they are through patents. For an analysis of the much-discussed experience curve as a barrier to entry, see the insert. The Experience Curve as an Entry Barrier In recent years, the experience curve has become widely discussed as a key element of industry structure. The experience curve, which encompasses many factors, is a broader concept than the better known learning curve, which refers to the efficiency achieved over a period of time by workers through much repetition.

The causes of the decline in unit costs are a combination of elements, including economies of scale, the learning curve for labor, and capital-labor substitution. Adherents of the experience curve concept stress the importance of achieving market leadership to maximize this barrier to entry, and they recommend aggressive action to achieve it, such as price cutting in anticipation of falling costs in order to build volume.

The answer is: not in every industry. In fact, in some industries, building a strategy on the experience curve can be potentially disastrous.

That costs decline with experience in some industries is not news to corporate executives.

Porter's Five Forces

The significance of the experience curve for strategy depends on what factors are causing the decline. If costs are falling because a growing company can reap economies of scale through more efficient, automated facilities and vertical integration, then the cumulative volume of production is unimportant to its relative cost position.

Here the lowest-cost producer is the one with the largest, most efficient facilities. A new entrant may well be more efficient than the more experienced competitors; if it has built the newest plant, it will face no disadvantage in having to catch up.

If costs go down because of technical advances known generally in the industry or because of the development of improved equipment that can be copied or downloadd from equipment suppliers, the experience curve is no entry barrier at all—in fact, new or less experienced competitors may actually enjoy a cost advantage over the leaders.

Free of the legacy of heavy past investments, the newcomer or less experienced competitor can download or copy the newest and lowest-cost equipment and technology. If, however, experience can be kept proprietary, the leaders will maintain a cost advantage.

But new entrants may require less experience to reduce their costs than the leaders needed. All this suggests that the experience curve can be a shaky entry barrier on which to build a strategy. While space does not permit a complete treatment here, I want to mention a few other crucial elements in determining the appropriateness of a strategy built on the entry barrier provided by the experience curve: The height of the barrier depends on how important costs are to competition compared with other areas like marketing, selling, and innovation.

The barrier can be nullified by product or process innovations leading to a substantially new technology and thereby creating an entirely new experience curve. If more than one strong company is building its strategy on the experience curve, the consequences can be nearly fatal. By the time only one rival is left pursuing such a strategy, industry growth may have stopped and the prospects of reaping the spoils of victory long since evaporated.

Access to distribution channels The newcomer on the block must, of course, secure distribution of its product or service.

A new food product, for example, must displace others from the supermarket shelf via price breaks, promotions, intense selling efforts, or some other means. The more limited the wholesale or retail channels are and the more that existing competitors have these tied up, obviously the tougher that entry into the industry will be.

Sometimes this barrier is so high that, to surmount it, a new contestant must create its own distribution channels, as Timex did in the watch industry in the s.

Porter's five forces analysis

Government policy The government can limit or even foreclose entry to industries with such controls as license requirements and limits on access to raw materials.

Regulated industries like trucking, liquor retailing, and freight forwarding are noticeable examples; more subtle government restrictions operate in fields like ski-area development and coal mining. The government also can play a major indirect role by affecting entry barriers through controls such as air and water pollution standards and safety regulations. The company is likely to have second thoughts if incumbents have previously lashed out at new entrants or if: The incumbents possess substantial resources to fight back, including excess cash and unused borrowing power, productive capacity, or clout with distribution channels and customers.

The incumbents seem likely to cut prices because of a desire to keep market shares or because of industrywide excess capacity. Industry growth is slow, affecting its ability to absorb the new arrival and probably causing the financial performance of all the parties involved to decline.

Customer acquisition costs are very high as seen in the battle with Didi.

Will investors be willing to fork out capital for a new entrant to fight an already established brand like Uber? Will a new entrant be able to get to critical mass on the driver side to provide a comparable value proposition e. Could new entrants come from unexpected areas?

Maybe Apple, Microsoft, Ford, Toyota, Volkswagen or other companies that already have a huge customer bases and a brand who can mobilise them at low marginal costs? Economies of scale: Can Uber scale up in a way that they have lower unit costs that makes it very hard for new entrants?

The answer likely is yes Can this help Uber increase their lead? This will discourage investors to support new entrants in markets where Uber is strong mainly the US The most likely scenario here is not that another global Uber emerges but rather several local competitors. I am not going to join this speculation. As you certainly know, Uber is investing a lot in self-driving technology themselves Better public transport: seems very unlikely.

I have not heard of any large cities with any success stories on this front sadly More people working from home: it is hard to assess if mobility requirements will reduce due to technological penetration but worth keeping an eye on Bike sharing can become a better option in cities that are growing fast and traffic congestion becomes an issue The threat of substitutes is low due to the very different value proposition of the substitutes — check the map above.

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If you are a human and are seeing this field, please leave it blank. Subscribe to as many of our downloads as you wish - they are all free! You will get an email notification of new articles roughly once a month, no spam ever, plus unsubscribe anytime. A new entrant may well be more efficient than the more experienced competitors; if it has built the newest plant, it will face no disadvantage in having to catch up.

Whether a drop in costs with cumulative not absolute volume erects an entry barrier also depends on the sources of the decline.

Contending Forces

If costs go down because of technical advances known generally in the industry or because of the development of improved equipment that can be copied or downloadd from equipment suppliers, the experience curve is no entry barrier at all—in fact, new or less experienced competitors may actually enjoy a cost advantage over the leaders.

Free of the legacy of heavy past investments, the newcomer or less experienced competitor can download or copy the newest and lowest-cost equipment and technology.

If, however, experience can be kept proprietary, the leaders will maintain a cost advantage. But new entrants may require less experience to reduce their costs than the leaders needed. All this suggests that the experience curve can be a shaky entry barrier on which to build a strategy. While space does not permit a complete treatment here, I want to mention a few other crucial elements in determining the appropriateness of a strategy built on the entry barrier provided by the experience curve:.

The newcomer on the block must, of course, secure distribution of its product or service. A new food product, for example, must displace others from the supermarket shelf via price breaks, promotions, intense selling efforts, or some other means.

The more limited the wholesale or retail channels are and the more that existing competitors have these tied up, obviously the tougher that entry into the industry will be.

Sometimes this barrier is so high that, to surmount it, a new contestant must create its own distribution channels, as Timex did in the watch industry in the s.

The government can limit or even foreclose entry to industries with such controls as license requirements and limits on access to raw materials. Regulated industries like trucking, liquor retailing, and freight forwarding are noticeable examples; more subtle government restrictions operate in fields like ski-area development and coal mining.

The government also can play a major indirect role by affecting entry barriers through controls such as air and water pollution standards and safety regulations. The company is likely to have second thoughts if incumbents have previously lashed out at new entrants or if:. From a strategic standpoint there are two important additional points to note about the threat of entry.

First, it changes, of course, as these conditions change. It is not surprising that Kodak plunged into the market.

Product differentiation in printing has all but disappeared. Conversely, in the auto industry economies of scale increased enormously with post-World War II automation and vertical integration—virtually stopping successful new entry. Second, strategic decisions involving a large segment of an industry can have a major impact on the conditions determining the threat of entry.

For example, the actions of many U. Similarly, decisions by members of the recreational vehicle industry to vertically integrate in order to lower costs have greatly increased the economies of scale and raised the capital cost barriers. Suppliers can exert bargaining power on participants in an industry by raising prices or reducing the quality of downloadd goods and services.

Powerful suppliers can thereby squeeze profitability out of an industry unable to recover cost increases in its own prices. By raising their prices, soft drink concentrate producers have contributed to the erosion of profitability of bottling companies because the bottlers, facing intense competition from powdered mixes, fruit drinks, and other beverages, have limited freedom to raise their prices accordingly.

Customers likewise can force down prices, demand higher quality or more service, and play competitors off against each other—all at the expense of industry profits.

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The power of each important supplier or downloader group depends on a number of characteristics of its market situation and on the relative importance of its sales or downloads to the industry compared with its overall business. Most of these sources of downloader power can be attributed to consumers as a group as well as to industrial and commercial downloaders; only a modification of the frame of reference is necessary.

Consumers tend to be more price sensitive if they are downloading products that are undifferentiated, expensive relative to their incomes, and of a sort where quality is not particularly important. The downloading power of retailers is determined by the same rules, with one important addition.

A company can improve its strategic posture by finding suppliers or downloaders who possess the least power to influence it adversely. Most common is the situation of a company being able to choose whom it will sell to—in other words, downloader selection.

Rarely do all the downloader groups a company sells to enjoy equal power. Even if a company sells to a single industry, segments usually exist within that industry that exercise less power and that are therefore less price sensitive than others.

For example, the replacement market for most products is less price sensitive than the overall market. As a rule, a company can sell to powerful downloaders and still come away with above-average profitability only if it is a low-cost producer in its industry or if its product enjoys some unusual, if not unique, features.

If the company lacks a low cost position or a unique product, selling to everyone is self-defeating because the more sales it achieves, the more vulnerable it becomes.

The company may have to muster the courage to turn away business and sell only to less potent customers. They focus on the segments of the can industry where they can create product differentiation, minimize the threat of backward integration, and otherwise mitigate the awesome power of their customers. In the ready-to-wear clothing industry, as the downloaders department stores and clothing stores have become more concentrated and control has passed to large chains, the industry has come under increasing pressure and suffered falling margins.

The industry has been unable to differentiate its product or engender switching costs that lock in its downloaders enough to neutralize these trends. By placing a ceiling on prices it can charge, substitute products or services limit the potential of an industry. Unless it can upgrade the quality of the product or differentiate it somehow as via marketing , the industry will suffer in earnings and possibly in growth.

Sugar producers confronted with the large-scale commercialization of high-fructose corn syrup, a sugar substitute, are learning this lesson today. Substitutes not only limit profits in normal times; they also reduce the bonanza an industry can reap in boom times.

In the producers of fiberglass insulation enjoyed unprecedented demand as a result of high energy costs and severe winter weather.

These substitutes are bound to become an even stronger force once the current round of plant additions by fiberglass insulation producers has boosted capacity enough to meet demand and then some. Substitutes often come rapidly into play if some development increases competition in their industries and causes price reduction or performance improvement. Rivalry among existing competitors takes the familiar form of jockeying for position—using tactics like price competition, product introduction, and advertising slugfests.

Intense rivalry is related to the presence of a number of factors:. As an industry matures, its growth rate changes, resulting in declining profits and often a shakeout. In the booming recreational vehicle industry of the early s, nearly every producer did well; but slow growth since then has eliminated the high returns, except for the strongest members, not to mention many of the weaker companies. The same profit story has been played out in industry after industry—snowmobiles, aerosol packaging, and sports equipment are just a few examples.

Technological innovation can boost the level of fixed costs in the production process, as it did in the shift from batch to continuous-line photo finishing in the s.A company can improve its strategic posture by finding suppliers or downloaders who possess the least power to influence it adversely. Customers, suppliers, potential entrants, and substitute products are all competitors that may be more or less prominent or active depending on the industry.

Highly profitable downloaders, however, are generally less price sensitive that is, of course, if the item does not represent a large fraction of their costs. Most of these sources of downloader power can be attributed to consumers as a group as well as to industrial and commercial downloaders; only a modification of the frame of reference is necessary.

In long-range planning the task is to examine each competitive force, forecast the magnitude of each underlying cause, and then construct a composite picture of the likely profit potential of the industry. Finally, Dr Pepper met Coke and Pepsi with an advertising onslaught emphasizing the alleged uniqueness of its single flavor. A focus on selling efforts in the fastest-growing segments of the industry or on market areas with the lowest fixed costs can reduce the impact of industry rivalry.

Suppliers can exert bargaining power on participants in an industry by raising prices or reducing the quality of downloadd goods and services. Bargaining power of suppliers.