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Porter's Five Forces Primer

Your business in the broader industry context.
by

T. Drew Smith

on 5 December 2013

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Transcript of Porter's Five Forces Primer

Porter's Five Forces
Competition
Your Business
Operational effectiveness
Cost controls
Revenue stream optimization
Corporate culture
etc.
Competitor
Operational effectiveness
Cost controls
Revenue stream optimization
Corporate culture
etc.
Competitor
Daily focus on:
Operational effectiveness
Cost controls
Revenue stream optimization
Corporate culture
etc.
Operational effectiveness
Cost controls
Revenue stream optimization
Corporate culture
etc.
Competitor
Operational effectiveness
Cost controls
Revenue stream optimization
Corporate culture
etc.
Competitor
Your Business lives in an ecosystem of other companies...
All fighting for customers.
Competition
Entrants
Substitutes
Customer Power
Supplier Power

There is
always
the threat of new challengers entering your market.
Entrants
With different operational capabilities,
funding sources, target populations, or market approaches.
Threat of Entry made worse with:
Low switching costs for buyers
Low barriers to entry, like low costs, brand equity, or regulations
Low differentiation of services or products offered by the incumbents
Substitutes
Changes in technology and business design, like eHealth & Telemedicine, constantly present a threat of substitution, even in "entrenched" industries.
Threat of substitutes is made worse with:
Low differentiation
Underserved or unhappy buyers
Buyer willingness to substitute
There is
always
the threat of substitutes taking business out of your market.
Buyers and Customers
Customers will
always
put pressure on your business to keep prices low.
Suppliers
The bargaining power of suppliers
always
puts pressure on your business costs

But your business does not
operate in a vacuum.
The bargaining power of customers is made stronger with:
Low switching costs (easy to actually switch, few "sunk" costs, etc.)
Availability of substitutes and choice of competitors
Bargaining groups
This is driven by customers' willingness to pay; a combination of economic forces including their preferences, supply/demand, and the broader economy.
Suppliers, from employee unions to device retailers, act in their own self-interests.
They are businesses, always trying to improve their bottom lines.
Supplier power is made stronger when there are:
Few substitutes for their supplies
"Critical" suppliers that are not easily replaced
Lost of purchasers (with low bargaining power to lower prices)
These forces interact and constantly shift.
But you can think about the movements in most markets using this framework.
It operates in a market environment
For more information see the original HBR article here:
http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/
or the wikipedia article here:
http://en.wikipedia.org/wiki/Porter_five_forces_analysis
or an interview (13:11) with Michael Porter here:
Full transcript