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Sample Essay on Porter’s Five Forces

Porter’s Five Forces

Porter’s five forces is a framework that takes its name after Michael E. Porter. It analyzes and identifies five competitive forces shaping any industry. Through the framework, it is possible to identify the strengths and weaknesses of an industry. These five forces include:

The concept is drawn upon IO (Industrial Organization) economics to establish the attractiveness and competitive intensity of a given market. In the context, attractiveness is the profitability of the industry. Any industry considered ‘unattractive’ is that where the combination of these factors serves to drive down the profitability level.

These forces were referred to as micro environment by Porter in order to create a contrast with macro environment which is a more general term. They comprise of forces close to the company and which affect ability not only to make profits but serve customers.

Any change in these forces requires the business unit to re-examine its market place in relation to the available industry information. The Five Forces were developed by Porter as a reaction to the SWOT analysis which at that time was famous. Porter viewed the SWOT analysis as ad hoc and un-rigorous. It is based on the Structure-conduct-Performance paradigm in IO economics.

New entrants’ threat

Factors that influence new entrants include:

  • Government policy
  • Capital requirements
  • Existence of barriers
  • Brand equity
  • Expected retaliation
  • Distribution access
  • Economies of scale
  • Absolute cost

Threat of services or substitute products

Potential factors in this case include:

  • Substitution ease
  • Substandard product
  • Quality depreciation
  • Buyer switching costs
  • Substitute products available in the market
  • Perceived product differentiation level

Customers bargaining power

This is described as market of outputs and includes factors such as:

  • Price sensitivity
  • Total trading amount
  • Availability of buyer information
  • Dependency degree on existing distribution channel
  • Force down prices

Suppliers bargaining power

Potential factors in this case include:

  • Substitute inputs presence
  • Employee solidarity
  • Impact of differentiation or input on costs
  • Distribution channel strength

Competitive rivalry strength

Potential factors include:

  • Advertising expense level
  • Competitive strategy
  • Concentration ratio
  • Transparency degree
  • Competition between offline and online companies
  • Competitive sustainable advantage through innovation

Use of Porter’s five forces

Porter’s five forces strategy is used by strategy consultants while making qualitative evaluation of the strategic position held by a firm. For majority of consultants though, the framework is just the starting ‘checklist’ or point. Like other general frameworks an analysis that uses the five forces and excludes specifics about a given situation is deemed naïve. Porter recommends that the model needs to be used in line with business industry level.

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Online sources:

http://en.wikipedia.org/wiki/Porter_five_forces_analysis

http://www.investopedia.com/terms/p/porter.asp