The five competitive forces that shape Strategy by Michael E. Porter

The five competitive forces that shape Strategy by Michael E. Porter

Michael E. Porter explained in his revolutionary 1979 HBR article called “How Competitive Forces Shape Strategy”. The competition is not only established industrial rivals also include four forces as well: customers, suppliers, potential entrants, and substitute products. The point of industry analysis is not to determinate the industry attractive or unattractive, or maybe moderate attractive, or highly attractive, but it's necessary to understand the underpinnings of competition and the root causes of profitability. It’s very important see the industry in overall, system terms and also determinate a list of pluses and minuses of the industry. It’s a kind of qualitative analysis; if you want to do this, you can meet with specialists in the industry that you investigate, or maybe with your co-workers (department of marketing, logistics, production, management),  result find paths that you competition never would have noticed. For me is the beginning of the industrial analysis.

Threat of new entrants to an industry

·         Investment cost

·         Economies of scale available to existing firms

·         Regulatory and legal restrictions

·         Product differentiation (including branding)

 Access to suppliers and distribution channels

·         Retaliation by established products

·         Bargaining power of suppliers

·         Uniqueness of the input supplied

·         Number and size of firms supplying the resources

·         Competition for the input from other industries

·         Cost of switching to alternative sources

Bargaining power of customers

·         Number of customers

·         Their size of their orders

·         Number of firms supplying the product

·         The threat of integrating backwards

·         The cost of switching

Threat of substitute products

·         Buyer propensity to substitute

·         Relative price performance of substitute

·         Buyer switching costs

·         Perceived level of product differentiation

·         Number of substitute products available in the market

·         Ease of substitution

·         Substandard product

·         Quality depreciation

Degree of competitive rivalry

·         Number of competitors in the market

·         Degree of dependency upon existing channels of distribution

·         Market size and growth prospects

·         Product differentiation and brand loyalty

·         The power of buyers and the availability of substitutes

·         Capacity utilisation

·         The cost structure of the industry

·         Exit barriers