Porters 5 Forces Flashcards
Porters 5 forces 1985
Definition: A framework devised by Michael E. Porter to analyze the competitive forces within an industry.
Purpose: Used to assess industry attractiveness and profitability.
Five Forces:
Threat of new entrants
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute products or services
Rivalry among existing competitors
Definition: The risk that new companies will enter an industry.
Barriers to Entry:
Economies of Scale: Established firms with lower per-unit costs can deter new entrants.
Brand Loyalty: Strong brands (e.g., Coca-Cola) can make it challenging for new entrants to gain market share.
Capital Requirements: High startup costs limit the number of potential new entrants.
Example: The airline industry has high capital requirements and stringent regulatory hurdles, serving as a barrier to new entrants.
Strategic Implication: Companies may strengthen their brand or increase operational efficiency to create barriers.
Definition: The influence suppliers have on the price and quality of goods and services.
Supplier Power Factors:
Concentration of Suppliers: When few suppliers dominate, they can demand higher prices or favorable terms (e.g., semiconductor suppliers).
Substitutability: If there are few substitutes for a supplier’s products, they have more power (e.g., rare materials).
Cost Structures: Companies must manage supplier relationships to minimize costs and enhance negotiation power.
Example: Automotive manufacturers depend on specific parts from limited suppliers, giving those suppliers leverage.
Strategic Implication: Firms might consider vertical integration to gain control over supply chains or diversify suppliers to reduce risk.
Definition: The ability of customers to affect pricing and terms.
Buyer Power Factors:
Volume of Purchases: Large volume buyers can negotiate lower prices (e.g., large retailers like Walmart).
Product Differentiation: When products are homogeneous, buyers have more power; differentiated products can reduce buyer power.
Price Sensitivity: High sensitivity means buyers will switch for better offers, influencing pricing strategies.
Example: In the smartphone market, consumers have significant bargaining power due to the availability of many alternatives.
Strategic Implication: Companies may invest in customer loyalty programs or unique product features to enhance customer retention.
Definition: Substitute products that fulfill the same need can threaten an industry’s profitability.
Factors Influencing Substitution:
Availability: More substitutes increase the threat (e.g., electric vehicles vs. traditional petrol cars).
Performance and Price: Substitutes offering better functionality or lower prices can draw customers away.
Example: The rise of streaming services (Netflix, Hulu) as substitutes for traditional cable TV poses a threat to cable providers.
Strategic Implication: Companies must continually innovate and improve value propositions to mitigate the threat of substitutes.
Definition: The intensity of competition among existing firms in the industry.
Factors Influencing Rivalry:
Number of Competitors: An increased number often leads to price wars and promotional competition.
Market Growth: Slow growth usually leads to more intense competition for market share.
Differentiation: Unique products can lessen price rivalry; otherwise, companies may engage in aggressive pricing strategies.
Example: The fast-food industry has high rivalry with companies constantly launching new products and promotional offers.
Strategic Implication: Businesses need to stay innovative and customer-focused to maintain competitiveness.
External Factors:
Economic conditions, technological advancements, and regulatory changes also significantly impact industry dynamics and are not covered in detail.
