5 Forces Analysis

The

Porter 5 Forces Analysis

is a framework for business management developed by Michael Porter in 1979. It uses concepts developed in Industrial Organization (IO) economics to derive 5 forces that determine the attractiveness of a market. It is also known as FFF (Fullerton's Five Forces).

Porter referred to these forces as the microenvironment, to contrast it with the more general term macro environment. 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.


Five forces

Bargaining power of customers,
Bargaining power of suppliers,
Threat of new entrants, and
Threat of substitute products
The level of competition
- combined 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
perceived level of product differentiation

The intensity of competitive rivalry

number of competitors
rate of industry growth
intermittent industry overcapacity
exit barriers
diversity of competitors
informational complexity and asymmetry
brand equity
fixed cost allocation per value added
level of advertising expense