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Porter Five Forces

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Michael Porter's 1979 framework uses concepts developed in IO economics to derive 5 forces that determine the attractiveness of a market. Porter referred to these forces as the microenvironment, to contrast it with the more general term macroenvironment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace.

Four forces -- the bargaining power of customers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products -- combine with other variables to influence a fifth force, the level of competition in an industry. Each of these forces has several determinants:

The bargaining power of customers

buyer concentration to firm concentration ratio

bargaining leverage

buyer volume

buyer switching costs relative to firm switching costs

buyer information availability

ability to backward integrate

availability of existing substitute products

buyer price sensitivity

price of total purchase

The bargaining power of suppliers

supplier switching costs relative to firm switching costs

degree of differentiation of inputs

presence of substitute inputs

supplier concentration to firm concentration ratio

threat of forward integration by suppliers relative to the threat of backward integration by firms

cost of inputs relative to selling price of the product

importance of volume to supplier

The threat of new entrants

the existence of barriers to entry

economies of product differences

brand equity

switching costs

capital requirements

access to distribution

absolute cost advantages

learning curve advantages

expected retaliation

government policies

The threat of substitute products

buyer propensity to substitute

relative price performance of substitutes

buyer switching costs




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