The Five Forces

1. Rivals
2. Suppliers
3. Buyers
4. Threat of Substitution
5. Threat of Entry

Notes

• Used to analyse industry
• For a structure analysis of the forces affecting any industry and thus any company
• If any other "force" lies outside, it is probably part of one or more of the five
• Always assess how the power of each force is changing the profit or cost of the firm or the industry
• Example Application
  • Deciding entry
  • Analysing strategic moves to focus on
  • Look at what is happening in the industry
  • Look for less direct "moves" against competition
  • Assess future threats

Buyers

• Powerful buyers force prices down or demand more value
• More powerful if
  • Undifferentiated
  • Expensive related to other costs or income
  • Inconsequential to own performance

Suppliers

• Powerful suppliers have leverage to charge higher prices or more favourable terms
• More powerful if
  • Large and concentrated relative to a fragmented industry (Goliath vs davids)
  • Industry needs them more than they need the industry
  • Switching costs in their favour
  • Differentiation in their favour
  • Credible threat of vertical integration