The Five Forces Framework

FIVE FORCES ANALYSIS
The threat of entry ...
Dependent on barriers to entry such as:
•economies of scale
•capital requirements of entry
•access to supply or distribution channels
•customer or supplier loyalty
•experience
•expected retaliation
•legislation or government action
•differentiation

Threat of substitutes
Reduction in demand for products as customers switch to alternatives:
•Product for product substitution
–e.g. email for post
•substitution of need
–e.g. reliable and cheap appliances reduce need for maintenance services
•generic substitution
–competition for household income, e.g. cars versus holidays
–doing without

Buyer power
buyer power is likely to be high where there is:
•a concentration of buyers
•many small operators in the supplying industry
•alternative sources of supply
•low switching costs
•components/materials that are a high percentage of cost to the buyer leading to “shopping around”
•a threat of backward integration

Supplier power is likely to be high where there is:
•a concentration of suppliers
•customers that are fragmented and bargaining power low
•high switching costs
•powerful supplier brand
•possible integration forward by the supplier

Competitive Rivalry is likely to be high when:
•competitors are in balance
•there is slow market growth (product life cycle)
•there are high fixed costs in an industry
•there are high exit barriers
•markets are undifferentiated

Key Aspects of 5-Forces Analysis

•Use at level of strategic business units (SBU)
•Define the industry/market/sector
•Don’t just list the forces: derive implications for industry/organisation
•Note connections between competitive forces and key drivers in macroenvironment
•Establish interconnections between the five forces
•Competition may disrupt the forces rather than accommodate them