Porter’s 5-Force Analysis
Michael Porter’s 5-forces can be used to analyze an industry and help shape and create a “competitive strategy” (Porter, 6). Understanding each of the five forces and how they interact with one another provides a clear picture of the degree of competition being faced within an industry, and therefore its relative attractiveness. The understanding cannot provide an advantage; it is what you do with the understanding. Without the understanding, a strategy can be at risk of being unrealistic. Michael Porter’s 5-force Analysis is a tool for the structural analysis of industries. There are 5 forces that always shape the competitive structure of an industry: Supplier Power, Barriers to Entry, The Threat of Substitutes, Buyer Power, and Industry Rivalry.
I. SUPPLIER POWER
Supplier power is the ability of a supplier to control the cost and supply of the inputs in the market. The supplier power of an industry can be altered in many ways:
1) Differentiation of Inputs – If a company needs various inputs from different suppliers, then those suppliers have a high power.
2) Switching Costs for Transferring to Other Suppliers - Supplier power is high if the cost to switch over to a new system is high.
3) Availability of Substitutes – If the raw material that’s needed for manufacturing can be replaced with alternatives, the supplier power is low.
4) Supplier Concentration – The fewer suppliers there are, the higher the supplier power.
5) Suppliers’ Dependence on Volume – If suppliers are dependent on supply volume, then the supplier power is low.
6) Cost Relative to Total Purchases in the Industry – If a company thinks that they are being overcharged, they may switch to another supplier.
7) Impact of Suppliers’ Inputs on the Quality – Supplier power is high if the inputs from a supplier reflect the quality of the company.
8) Threat of forward integration by suppliers – The supplier power is low, if the company can easily switch to a different supplier.
Examples of high supplier power industries are operating system and office productivity software suppliers to the PC Industry because it is dominated by few companies such as Unix, Microsoft. On the other hand, an example of a low supplier power industry is the computer hardware industry. Suppliers should make their products meet the worldwide standard so that products are compatible.
II. Barriers to Entry
Barriers to entry deter new competitors from entering the market and creating more competition for established firms. There are several major barriers to entry and they include economies of scale, capital requirements, product differentiation, switching costs, cost disadvantages independent of scale, access to distribution channels, and government policy. One example of an industry with high barriers to entry is computer chip manufacturing. The extremely high cost of building a fabrication plant makes entry into this industry very risky. The...