Harvard Business School

Porter's Five Forces is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979.

The five forces

[edit] The threat of the entry of new competitors

Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will tend towards zero (perfect competition).

* The existence of barriers to entry (patents, rights, etc.) The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily.

* Economies of product differences

* Brand equity

* Switching costs or sunk costs

* Capital requirements

* Access to distribution

* Customer loyalty to established brands

* Absolute cost

* Industry profitability; the more profitable the industry the more attractive it will be to new competitors

[edit] The threat of substitute products or services

The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives:

* Buyer propensity to substitute

* Relative price performance of substitute

* Buyer switching costs

* Perceived level of product differentiation

* Number of substitute products available in the market

* Ease of substitution. Information-based products are more prone to substitution, as online product can easily replace material product.

* Substandard product

* Quality depreciation

[edit] The bargaining power of customers (buyers)

The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes.

* Buyer concentration to firm concentration ratio

* Degree of dependency upon existing channels of distribution

* Bargaining leverage, particularly in industries with high fixed costs

* Buyer volume

* Buyer switching costs relative to firm switching costs