Michael Porter’s

Five Forces
Model
 Michael Porter …


 “An industry’s profit

potential is largely
determined by the
intensity of competitive
rivalry within that
industry.”
Porter’s Five Forces
 Portfolio Analysis …
… Strategy at the time
(1970s) was focused on two
dimensions of the portfolio
grids …
… Industry Attractiveness

… Competitive Position


Business Strength
Matrix
 Where was
Michael Porter
coming from?
 School of Economics
…

… at Harvard …

… Exposed Porter to the
Industrial Organization
(I0) sub-field of
Economics.

 Structural reasons
why …
… some industries were
profitable
* Firm concentration

 * Established cost
advantages
 * Product differentiation
 * Economies of scale
 Structural reasons …
… all represented barriers


to entry in certain
industries, thus allowing
those industries to be
more profitable than
others.
 But Economists …
… generally concerned


them-selves with the

minimization rather than
maximization of what they
viewed as excess profits
(i.e., Public Policy).
 Business policy
objective

… of profit
maximization
 Porter developed his
elaborate framework for
the structural analysis of
industry attractive-ness
within the framework of
Business Policy.

 Michael Porter …


 By using a framework rather

than a formal statistical
model,
model Porter identified the
relevant variables and the
questions that the user must
answer in order to develop
conclusions tailored to a
particular industry and
 Porters Five Forces …
 * Threat of Entry
 * Bargaining Power of
Suppliers
 * Bargaining Power of
Buyers
 * Development of
Substitute Products or
Services
 Barriers to Entry …
… large capital requirements or the
need to gain economies of scale
quickly.
… strong customer loyalty or strong

brand preferences.
… lack of adequate distribution

channels or access to raw materials.

materials

 Power of Suppliers …

… high when
* A small number of dominant, highly
concentrated suppliers exists.
* Few good substitute raw materials or

suppliers are available.

* The cost of switching raw materials

or suppliers is high.

 Power of Buyers …

… high when
* Customers are concentrated,
concentrated large or
buy in volume .
* The products being purchased are

standard or undifferentiated making it

easy to switchto
switch other suppliers.
* Customers’ purchases represent a

major portion of the sellers’ total

revenue.

 Substitute products …
 … competitive strength high
when
* The relative price of substitute
products declines .
* Consumers’ switching costs decline.
decline
* Competitors plan to increase market

penetration or production capacity.

capacity

 Rivalry among
competitors
 … intensity increases
as
* The number of competitors increases
or they become equal in size.
size
* Demand for the industry’s products

declines or industry growth slows.

slows
* Fixed costs or barriers to leaving the

industry are high.

high

 Summary …
 As rivalry among competing
firms intensifies,
intensifies industry
profits decline,
decline in some
cases to the point where an
industry becomes inherently
unattractive.
unattractive

 The Experience Curve
…

… as an entry barrier
 Unit costs associated with
economies of scale, the learning
curve for labor, and capital-labor
substitution decline with
“experience,”
experience and this creates a
barrier to entry,
entry as new competitors
with no “experience” face higher
costs than established ones.

 However …
… If a new entrant has built the
newest, most efficient plant, it will
not have to “catch up.”
up
… Technical advances purchased by

new entrants – free from the legacy of

heavy past Investments – may
provide those companies a cost
advantage over the leaders.

 In addition …
 The experience curve barrier can
be nullified by product or process
innovations that create an entirely
new experience curve – one to
which leaders may be poorly
positioned to jump,
jump but to which
new entrants can alight as they
enter the market .

 Strategic Groups …


 Firms that face similar threats

or opportunities in an industry
but which differ from the threats
and opportunities faced by other
sets of firms in the same
industry (e.g., in the beverage
industry: soft drinks group
versus alcoholic beverages).


Strategic Groups …
 Rivalry generally is more
intense within strategic groups
than between them because
members of the same group
focus on the same market
segments with similar products,
products
strategies and resources.
resources

 BOSTON
CONSULTING
GROUP MATRIX
INTRODUCTION:


 BOSTON CONSULTING GROUP

(BCG) MATRIX is developed by
BRUCE HENDERSON of the
BOSTON CONSULTING GROUP IN
THE EARLY 1970’s.
 According to this technique, businesses
or products are classified as low or high
performers depending upon their
market growth rate and relative market
share.
Relative Market Share and


Market Growth

TO UNDERSTAND THE BOSTON

MATRIX YOU NEED TO UNDERSTAND HOW
MARKET SHARE AND MARKET GROWTH
INTERRELATE.
 BCG Matrix
Relative Market Share Position
Hig Med Low
h ium 0.0
1.0 .50
Hig
h
+20
S ta rs Q u e stio n M a rks
II I
R htworG selaS yrtsudnI

Medi
um
0

C a sh C o w s D ogs
III IV
Low
-20

28
BCG Matrix

Question Marks
§Low relative market share – compete in
high-growth industry
§Cash needs are high
§Case generation is low
§
§Decision to strengthen (intensive
strategies) or divest

30
BCG Matrix

Stars
§High relative market share and high growth
rate
§Best long-run opportunities for growth &
profitability
§
§Substantial investment to maintain or
strengthen dominant position
§Integration strategies, intensive
strategies, joint ventures

31
BCG Matrix

Cash Cows
§High relative market share, competes in
low-growth industry
§Generate cash in excess of their needs
§Milked for other purposes
§Maintain strong position as long as
possible
§Product development, concentric
diversification
§If weakens—retrenchment or divestiture

32
BCG Matrix

Dogs

§Low relative market share & compete in

slow or no market growth
§Weak internal & external position
§
§Liquidation, divestiture, retrenchment

33
 GE / McKinsey Multifactor Portfolio
Matrix
INDUSTRY ATTRACTIVENESS

Manage
Invest Invest Selectively
for Earnings
BUSINESS STRENGTH

Manage
Invest Selectively Harvest or
for Earnings Divest

Manage
Harvest or Harvest or
Selectively
Divest Divest
for Earnings

business diagram, management model, business graphic,

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SWOT Matrix

§Strengths
§Weaknesses
§Opportunities
§Threats

35
SWOT Matrix

Four Types of
Strategies
§Strengths-Opportunities (SO)
§Weaknesses-Opportunities (WO)
§Strengths-Threats (ST)
§Weaknesses-Threats (WT)

36
 SO Strategies

Strengths Use a firm ’ s

Weaknesses internal
Opportunitie strengths
s SO to take
Threats Strate advantage
of external
gies opportunities
SWOT

37
 WO Strategies

Strengths Improving
Weaknesses internal
Opportunitie weaknesses by
s WO taking
Threats Strate advantage
of external
gies opportunities
SWOT

38
 ST Strategies

Strengths Use a firm ’ s

Weaknesses strengths
Opportunitie to avoid or
s ST reduce the
Threats Strate impact
of external
gies threats
SWOT

39
 WT Strategies

Defensive
Strengths tactics
Weaknesses aimed at
Opportunitie reducing
internal
s WT weaknesses &
Threats Strate avoiding
gies environmental
SWOT threats

40
SWOT Matrix

Developing the SWOT

§List firm’s key internal Strengths

§List firm’s key internal Weaknesses
§List firm’s key external Opportunities
§List firm’s key external Threats

41
 SWOT Matrix
Leave Blank Strengths – S Weaknesses – W

List Strengths List Weaknesses

Opportunities – O SO Strategies WO Strategies

List Opportunities Use strengths to take Overcoming weaknesses by

advantage of taking advantage of
opportunities opportunities

Threats – T ST Strategies WT Strategies

List Threats Use strengths to avoid Minimize weaknesses and

threats avoid threats

42
 Matching Key Factors to Formulate Alternative
Strategies
Key Internal Key External Resultant
Factor Factor Strategy

20% annual growth in

Excess working capital + the cell phone = Acquire Cellfone, Inc.
(strength) industry (opportunity)

Exit of two major Pursue horizontal

Insufficient capacity foreign competitors
+ = integration by buying
(weakness) form the industry competitor's facilities
(opportunity )

Decreasing numbers of Develop new products for

Strong R&D (strength) + =
young adults (threat) older adults

Poor employee morale = Develop

Strong union a new employee
+
(weakness) activity (threat) benefits package

43
 Industry & Product
Life Cycles
