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AgraphicalrepresentationofPorter'sfiveforcesPorterfiveforcesanalysisFromWikipedia,thefreeencyclopediaPorterfiveforcesanalysisisaframeworktoanalyzelevelofcompetitionwithinanindustryandbusinessstrategydevelopment.Itdrawsuponindustrialorganization(IO)economicstoderivefiveforcesthatdeterminethecompetitiveintensityandthereforeattractivenessofamarket.Attractivenessinthiscontextreferstotheoverallindustryprofitability.Anunattractiveindustryisoneinwhichthecombinationofthesefiveforcesactstodrivedownoverallprofitability.Averyunattractiveindustrywouldbeoneapproachingpurecompetition,inwhichavailableprofitsforallfirmsaredriventonormalprofit.ThisanalysisisassociatedwithitsprincipalinnovatorMichaelE.PorterofHarvardUniversity.Porterreferredtotheseforcesasthemicroenvironment,tocontrastitwiththemoregeneraltermmacroenvironment.Theyconsistofthoseforcesclosetoacompanythataffectitsabilitytoserveitscustomersandmakeaprofit.Achangeinanyoftheforcesnormallyrequiresabusinessunittore-assessthemarketplacegiventheoverallchangeinindustryinformation.Theoverallindustryattractivenessdoesnotimplythateveryfirmintheindustrywillreturnthesameprofitability.Firmsareabletoapplytheircorecompetencies,businessmodelornetworktoachieveaprofitabovetheindustryaverage.Aclearexampleofthisistheairlineindustry.Asanindustry,profitabilityislowandyetindividualcompanies,byapplyinguniquebusinessmodels,havebeenabletomakeareturninexcessoftheindustryaverage.Porter'sfiveforcesinclude-threeforcesfrom'horizontal'competition:thethreatofsubstituteproductsorservices,thethreatofestablishedrivals,andthethreatofnewentrants;andtwoforcesfrom'vertical'competition:thebargainingpowerofsuppliersandthebargainingpowerofcustomers.PorterdevelopedhisFiveForcesanalysisinreactiontothethen-popularSWOTanalysis,whichhefoundunrigorousandadhoc.[1]Porter'sfiveforcesisbasedontheStructure-Conduct-Performanceparadigminindustrialorganizationaleconomics.Ithasbeenappliedtoadiverserangeofproblems,fromhelpingbusinessesbecomemoreprofitabletohelpinggovernmentsstabilizeindustries.[2]OtherPorterstrategicframeworksincludethevaluechainandthegenericstrategies.Contents1Fiveforces1.1Threatofnewentrants1.2Threatofsubstituteproductsorservices1.3Bargainingpowerofcustomers(buyers)1.4Bargainingpowerofsuppliers1.5Intensityofcompetitiverivalry2Usage3Criticisms4Seealso5References6FurtherreadingFiveforcesThreatofnewentrantsProfitablemarketsthatyieldhighreturnswillattractnewfirms.Thisresultsinmanynewentrants,whicheventuallywilldecreaseprofitabilityforallfirmsintheindustry.Unlesstheentryofnewfirmscanbeblockedbyincumbents(whichinbusinessreferstothelargestcompanyinacertainindustry,forinstance,intelecommunications,thetraditionalphonecompany,typicallycalledtheincumbentoperator),theabnormalprofitratewilltrendtowardszero(perfectcompetition).Thefollowingfactorscanhaveaneffectonhowmuchofathreatnewentrantsmaypose:Theexistenceofbarrierstoentry(patents,rights,etc.).Themostattractivesegmentisoneinwhichentrybarriersarehighandexitbarriersarelow.Fewnewfirmscanenterandnon-performingfirmscanexiteasily.GovernmentpolicyCapitalrequirementsAbsolutecostCostdisadvantagesindependentofsizeEconomiesofscaleEconomiesofproductdifferencesProductdifferentiationBrandequitySwitchingcostsorsunkcostsExpectedretaliationAccesstodistributionCustomerloyaltytoestablishedbrandsIndustryprofitability(themoreprofitabletheindustrythemoreattractiveitwillbetonewcompetitors)ThreatofsubstituteproductsorservicesTheexistenceofproductsoutsideoftherealmofthecommonproductboundariesincreasesthepropensityofcustomerstoswitchtoalternatives.Forexample,tapwatermightbeconsideredasubstituteforCoke,whereasPepsiisacompetitor'ssimilarproduct.IncreasedmarketingfordrinkingtapwatermightshrinkthepieforbothCokeandPepsi,whereasincreasedPepsiadvertisingwouldlikelygrowthepie(increaseconsumptionofallsoftdrinks),albeitwhilegivingPepsialargersliceatCoke'sexpense.Anotherexampleisthesubstituteoftraditionalphonewithasmartphone.Potentialfactors:BuyerpropensitytosubstituteRelativepriceperformanceofsubstituteBuyerswitchingcostsPerceivedlevelofproductdifferentiationNumberofsubstituteproductsavailableinthemarketEaseofsubstitutionSubstandardproductQualitydepreciationBargainingpowerofcustomers(buyers)Thebargainingpowerofcustomersisalsodescribedasthemarketofoutputs:theabilityofcustomerstoputthefirmunderpressure,whichalsoaffectsthecustomer'ssensitivitytopricechanges.Firmscantakemeasurestoreducebuyerpower,suchasimplementingaloyaltyprogram.Thebuyerpowerishighifthebuyerhasmanyalternatives.Thebuyerpowerislowiftheyactindependentlye.g.Ifalargenumberofcustomerswillactwitheachotherandasktomakepriceslowthecompanywillhavenootherchoicebecauseoflargenumberofcustomerspressure.Potentialfactors:BuyerconcentrationtofirmconcentrationratioDegreeofdependencyuponexistingchannelsofdistributionBargainingleverage,particularlyinindustrieswithhighfixedcostsBuyerswitchingcostsrelativetofirmswitchingcostsBuyerinformationavailabilityForcedownpricesAvailabilityofexistingsubstituteproductsBuyerpricesensitivityDifferentialadvantage(uniqueness)ofindustryproductsRFM(customer