Competitive Forces - the Five Forces Framework

17 October 2012

11:36

Chapter 2 pp.25-43

Industries and Sectors

Porters FIVE Force's Framework

Competitive Forces - the five forces Framework

Helps identify the attractiveness of an industry in terms of five COMPETITIVE forces: the threat of entry, the threat of substitutes, the power of buyers, the power of suppliers and the extent of rivalry between competitors. The five forces together constitute the industry's "structure."

An attractive industry structure is one that offers good profit potential. Where the five forces are high, industries are not attractive to compete in. There will be too much competition and too mush pressure to allow good profits.

Can help set an agenda for action on the various critical issues that they identify.

1) The Threat of Entry

How easy it is to enter the industry obviously influences the degree of competition. The greater the threat of entry, the worse it is for incumbents in an industry. An attractive industry has high barriers to entry. Barriers to entry are the factors that need to be overcome by new entrants.

• Scale and Experience - In some industries economies of scale are extremely important. Eg. In the production of cars. Once incumbents have reached large-scale production, it will be very expensive for new entrants to match them until they reach a similar volume, they will have higher unit costs. This scale effect is increased where there are high investment requirements for entry. Eg. Capital investment costs in automobiles. Barriers to entry also come from experience curve effects that give incumbents a cost advantage because they have learnt how to do things more efficiently.

• Access to supply or distribution channels

• Expected retaliation - If an organisation considering entering an industry believes that the retaliation of an existing firm will