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Porter's Five Forces A Model For Industry Analysis

4042 words - 17 pages

12/6/2014

Porter's Five Forces

 QuickMBA / Strategy / Porter's 5 Forces

Porter's Five Forces
A MODEL FOR INDUSTRY ANALYSIS

The model of pure competition implies that risk­adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure. Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates. ...view middle of the document...

 Rivalry In the traditional economic model, competition among rival firms drives profits to zero. But competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms strive for a competitive advantage over their rivals. The intensity of rivalry among firms varies across industries, and strategic analysts are interested in these differences. Economists measure rivalry by indicators of  industry concentration. The Concentration Ratio (CR) is one such measure. The Bureau of Census periodically reports the CR for major Standard Industrial Classifications (SIC's). The CR indicates the percent of market share held by the four largest firms (CR's for the largest 8, 25, and 50 firms in an industry also are available). A high concentration ratio indicates that a high concentration of market share is held by the largest firms ­ the industry is concentrated. With only a few firms holding a large market share, the competitive landscape is less competitive (closer to a monopoly). A low concentration ratio indicates that the industry is characterized by many rivals, none of which has a significant market share. These fragmented markets are said to be competitive. The concentration ratio is not the only available measure; the trend is to define industries in terms that convey more information than distribution of market share. If rivalry among firms in an industry is low, the industry is considered to be disciplined. This discipline may result from the industry's history of competition, the role of a leading firm, or informal compliance with a generally understood code of conduct. Explicit collusion generally is illegal and not an option; in low­rivalry industries competitive moves must be constrained informally. However, a maverick firm seeking a competitive advantage can displace the otherwise disciplined market. When a rival acts in a way that elicits a counter­response by other firms, rivalry intensifies. The intensity of rivalry commonly is referred to as being cutthroat, intense, moderate, or weak, based on the firms' aggressiveness in attempting to gain an advantage. In pursuing an advantage over its rivals, a firm can choose from several competitive moves: Changing prices ­ raising or lowering prices to gain a temporary advantage. Improving product differentiation ­ improving features, implementing innovations in the manufacturing process and in the product itself. Creatively using channels of distribution ­ using vertical integration or using a distribution channel that is novel to the industry. For example, with high­end jewelry stores reluctant to carry its watches, Timex moved into drugstores and
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12/6/2014

Porter's Five Forces

other non­traditional outlets and cornered the low to mid­price watch market. Exploiting relationships with suppliers ­ for example, from the 1950's to the 1970's Sears, Roebuck and Co. dominated the retail household appliance...

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