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Porter's Five Forces Analysis

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Five Forces Analysis

Introduction (1)
• Devised by Michael Porter • It a framework for the analysis of the structural factors that shape competition within an industry • The five forces:
• Determine the profitability of an industry • Assess how attractive and potentially profitable is an industry

Introduction (2)
• This is a framework for understanding an industry or an organisation’s position with respect to the forces operating in the microenvironment • It can be used to explain the performance of competitors in a market • From the analysis a number of generic competitive strategies can be derived
• Cost leadership • Differentiation • Focus

The five forces
• The ability of firms to earn an good return depends on five forces: namely the… • Threat of new entrants‐ the ability of new competitors to enter the industry • Bargaining power of suppliers • Bargaining power of customers • Threat of substitute products • Degree of competitive rivalry

The five forces framework
Threat of Substitute Products

Bargaining Power of Suppliers

Intensity of rivalry within the industry

Bargaining Power of Buyers (Customers)

Threat of New Entrants

The threat of new entrants

Threat of new entrants
• If new entrants move into an industry they will gain market share, rivalry will accelerate and profits will decline • If it is difficult to enter an industry the position of existing firms will be strengthened • Impediments to the entry of new firms are known as barriers to entry • If barriers to entry are low then the threat of new entrants will be high, and vice versa

Barriers to entry
• Capital cost of entry
• High cost will deter entry • High capital requirements might mean that only large firms can compete

• Economies of scale available to existing firms
• If they enjoy absolute cost advantages based on large scale then…...

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