Industry Analysis and the Five Forces
Objective: Develop skills in analyzing industry dynamics.
Focus (80/20): Prioritize key factors influencing industry competitiveness.
Industry analysis using the Five Forces Framework is a valuable tool for strategic decision-making. By understanding the dynamics within an industry, organizations can formulate effective strategies that capitalize on opportunities and mitigate potential threats.
Introduction to Industry Analysis:
Industry analysis is a critical component of strategic management that involves assessing the attractiveness and competitiveness of an industry. It helps organizations understand the forces that shape competition and identify strategic opportunities and threats.
The Five Forces Framework:
Developed by Michael Porter, the Five Forces Framework provides a systematic way to analyze the competitive forces within an industry.
- Threat of New Entrants:
- Factors to Consider:
- Barriers to entry (economies of scale, brand loyalty, capital requirements).
- Access to distribution channels.
- Government policies and regulations.
- Factors to Consider:
- Bargaining Power of Buyers:
- Factors to Consider:
- Number of buyers and their size.
- Standardization of products.
- Switching costs for buyers.
- Factors to Consider:
- Bargaining Power of Suppliers:
- Factors to Consider:
- Number of suppliers and their size.
- Uniqueness of services or products.
- Availability of substitute inputs.
- Factors to Consider:
- Threat of Substitute Products or Services:
- Factors to Consider:
- Availability of alternatives.
- Level of differentiation.
- Price sensitivity of buyers.
- Factors to Consider:
- Intensity of Competitive Rivalry:
- Factors to Consider:
- Number of competitors.
- Rate of industry growth.
- Differentiation among products.
- Exit barriers.
- Factors to Consider:
Application of the Five Forces:
- Identifying Sources of Competitive Advantage:
- Understanding the forces helps identify areas where a company can establish a competitive advantage.
- Understanding the forces helps identify areas where a company can establish a competitive advantage.
- Strategic Positioning:
- Companies can position themselves strategically by addressing the forces appropriately.
- For example, differentiation can reduce the threat of substitutes, while economies of scale can deter new entrants.
- Industry Evolution:
- The forces can change over time as industries evolve. Analyzing these changes is crucial for adapting strategies accordingly.
Real-World Examples:
- The Pharmaceutical Industry:
- Threat of New Entrants: High due to the need for extensive research and development.
- Bargaining Power of Buyers: Relatively low due to the critical nature of drugs.
- Bargaining Power of Suppliers: Moderate, as there are a limited number of raw material suppliers.
- Threat of Substitutes: Low, especially for specific medications.
- Intensity of Competitive Rivalry: High, given the number of companies and the need for innovation.
- The Airline Industry:
- Threat of New Entrants: Moderate, as high capital requirements act as a barrier.
- Bargaining Power of Buyers: High due to the availability of alternatives and price sensitivity.
- Bargaining Power of Suppliers: Moderate, as there are multiple suppliers for aircraft.
- Threat of Substitutes: Moderate, with alternatives like train or car travel.
- Intensity of Competitive Rivalry: High, with many competitors and price competition.
- Porter’s Five Forces Model and The Music Industry
Resources:
Harvard Business School. (n.d.). The five business forces. Retrieved from isc.hbs.edu/strategy/business-strategy/Pages/the-five-forces.aspx
Martin, M. (2019, December 3). How porter’s five forces can help small businesses analyze the competition. Retrieved from https://www.businessnewsdaily.com/5446-porters-five-forces.html
Scott, G. (2020, February 21). Porter’s five forces? Retrieved from https://www.investopedia.com/terms/p/porter.asp