Lesson 5 of 7 · 15 min
Industry structure: Porter's Five Forces
Porter's Five Forces explain an industry's long-run profitability: the threat of new entrants, the threat of substitutes, customer power and supplier power all feed the rivalry among existing competitors; intense forces mean low returns, benign forces mean high ones.
In short
- The four outside forces (new entrants, substitutes, customers, suppliers) determine the rivalry among existing competitors, which sets long-run ROIC.
- Entry barriers: network effects, economies of scale and scope, brand loyalty, switching costs, exclusive access to inputs or customers, government policy. Experience and expertise are not sustainable barriers.
- Substitutes threaten when they meet the same need, are cheaper or improving, when customers can go without, and when switching is easy.
- Customers are powerful when few and concentrated, products are standardised, the product is a large part of their budget, or they can backward-integrate; their power falls when the product is critical.
- Suppliers are powerful when few, specialised or costly to switch away from, and when there are no substitutes for their products. Rivalry is high with price-war history, many equal-sized firms, undifferentiated products, high exit barriers and slow growth.
Unlock this lesson free for 7 days
Create a free account to get 7 days of full access — every lesson, video, flashcard, mock and the question bank. No card needed.