Payroll System

Porter five forces analysis

Porter five forces analysis is a framework for industry analysis and business strategy development. It draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit.

This five forces analysis is just one part of the complete Porter strategic models. The other elements are the value chain and the generic strategies.

History

Porter five forces analysis is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979.

Five forces

Threat of new entrants

Profitable markets that yield high returns will attract new firms.

• The existence of barriers to entry (patents, rights, etc.) The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily.

• Economies of product differences

• Brand equity

• Switching costs or sunk costs

• Capital requirements

• Expected retaliation

• Access to distribution

• Customer loyalty to established brands

• Absolute cost

• Industry profitability; the more profitable the industry the more attractive it will be to new competitors.

Threat of new entrants sources 1) Economies of scale, 2)Product differentiation, 3)Cost disadvantages independent of size, 4)Access to distribution channels, 5)Government Policy.

Threat of substitute products or services

The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives. For example,...