Porter’s Five Forces - University of Dayton



Porter’s Five Forces and Factors that Impact the Strength of the Forces

1. Threat of New Entrants

a. Economies of scale

b. Product differentiation

c. Capital requirements

d. Switching costs faced by customers if they were to switch to another supplier of the good

e. Access to distribution channels (e.g., if the entrant cannot secure a way to distribute it’s product, it is a barrier to their entry)

f. Cost advantages independent of scale (e.g., other cost advantages other than capturing economies of scale)

i. Proprietary technology: secret or patented technology

ii. Managerial know-how: tacit knowledge

iii. Favorable access to raw materials: low cost access to critical raw materials

iv. Learning-curve cost advantages

g. Government regulation of entry

2. Threat of Rivalry

a. Large number of competing firms that are roughly the same size

i. This leads to price competition

b. Slow industry growth

c. Lack of product differentiation

d. High exit barriers

e. Capacity added in large increments

i. If, in order to obtain economics of scale, production capacity must be added in large increments, an industry is likely to experience periods of oversupply after new capacity comes online. This leads to price cutting.

3. Threat of Substitutes

a. The availability of substitutes from other industries (e.g., in the auto manufacturing industry, substitutes come in the form of public transportation, bicycles, flying, walking, etc.).

4. Threat of Suppliers

a. Suppliers’ industry dominated by a small number of firms—so there are only a few suppliers

b. Suppliers sell unique or highly differentiated products

c. Suppliers are not threatened by substitutes

d. Suppliers threaten forward (vertical) integration

i. If suppliers can start a company whereby they use the products/services they produce, they become more powerful because they are not as dependent on those purchasing the products/services (e.g., tire manufacturing companies now sell their tires via retail stores and are therefore not solely dependent on auto manufacturers to purchase their tires as they assemble the vehicles).

e. Firms are not important customers for suppliers

5. Threat of Buyers

a. Number of buyers is small

i. Because there are few buyers, they can have more power over those providing the goods. Large-volume buyers are also powerful.

b. Products sold to buyers are undifferentiated and standard

i. If the goods are commodities, buyers can always find alternative products

c. Buyers are not earning significant economic profits

i. If buyers are not earning high economic profits, they are 1) likely to be very price sensitive, and 2) their simple ability to afford higher-priced goods is low.

d. Buyers threaten backward (vertical) integration

i. If buyers can easily backward integrate (e.g., produce the goods or perform the service themselves) this gives them power

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Power of Buyers

Threat of Substitutes

Threat of New Entrants

Power of Suppliers

Threat of Rivalry

The results of our Porter’s Five Forces analysis tell us if the industry is attractive—if we should consider starting a new venture within the industry—as well as how likely it would be for our firm to capture long-term profitability should we enter the industry.

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