Porters model of 5 competitive forces is one of the

most often used business strategy tools

How easy or hard it is for new entrants to
start and compete? Any barriers to their
entry?

Potential New
Entrants
How strong is the rivalry among existing
players? Does only one player dominate?

Bargaining
Power of Suppliers
How strong is the position of the
suppliers? Are there many? Few?
Monopoly?
Source:
Michael E. Porter Forces Governing
Competition in
Industry (Harvard Business
Review, Mar.-Apr. 1979)

IntraIndustry Rivalry
Strategic Business
Unit

Bargainin
g
Power of
the
How strong is the position
Buyers
of the buyers?
Can we sell
in large volumes? Do we
need to discount heavily?

Substitute
Products
and Services

How easy or hard it is for

a new product or service to replace what already exists?

Generic
Industry
Force

Generic Strategies

Strategies and Industry Forces

Cost
Leadership

Differentiation

Focus

Entry
Barriers

Ability to cut price in

retaliation deters potential
entrants.

Customer loyalty can

discourage potential
entrants.

Focusing develops core

competencies that can act
as an entry barrier.

Buyer
Power

Ability to offer lower price

to powerful buyers.

Large buyers have less

power to negotiate
because of few close
alternatives.

Large buyers have less

power to negotiate
because of few
alternatives.

Supplier
Power

Better insulated from

powerful suppliers.

Better able to pass on

supplier price increases to
customers.

Suppliers have power

because of low volumes,
but a differentiationfocused firm is better able
to pass on supplier price
increases.

Threat of
Substitutes

Can use low price to

defend against
substitutes.

Customer's become
attached to differentiating
attributes, reducing threat
of substitutes.

Specialized products &

core competency protect
against substitutes.

Better able to compete on

price.

Brand loyalty to keep

customers from rivals.

Rivals cannot meet

differentiation-focused
customer needs.

Rivalry

Applying the Porter Competitive Model to

Wal-Mart
Potential
New Entrants

Foreign General Merchandisers

or Discounters
Established Retailer Shifting
Strategy to Discounting or
Megastores

Intra-Industry Rivalry
Bargaining
Power
of Suppliers

U.S. Product Manufacturers

Foreign Manufacturers
Local Governments
I/T Product and Service
Suppliers

SBU: Wal-Mart
Rivals: Kmart, Target,
Toys R Us, Specialty Stores

Bargaining
Power of Buyers

Substitute
Products
and Services

Mail Order
Telemarketing
Home Shopping Network Buying Clubs
Electronic Shopping
Door-to-door Sales

Consumers in Small
Town U.S.A.
Consumers in the
Metropolitans Areas
in the U.S.
Canadian and
Mexican Consumers
Other Foreign
Consumers

Porter Competitive Model

Education Industry: U.S. Universities
Potential
New Entrants

Bargaining
Power
of Suppliers

Faculty and Staff

Equipment, Service,

Suppliers
Alumni
Foundations, Business
Government

Foreign Universities
Distance Learning
Motorola University
Phoenix, DeVry, National

Intra-Industry Rivalry
Strategic Business Unit

Substitute
Products
and Services

Books and Videotapes

Computer-Based Training
Training Companies
Consulting Firms

Bargaining
Power of Buyers

Students
Parents
Business
Employers
Legislators

 The government plays an important role in Porters diamond

model. Like everybody else, Porter argues that there are

some things that governments do that they shouldn't, and
other things that they do not do but should. He says,
"Governments proper role is as a catalyst and challenger; it
is to encourage - or even push - companies to raise their
aspirations and move to higher levels of competitive
performance "
Governments can influence all four of Porters determinants
through a variety of actions such as

Subsidies to firms, either directly (money) or indirectly (through

infrastructure).
Tax codes applicable to corporation, business or property ownership.
Educational policies that affect the skill level of workers.
They should focus on specialized factor creation. (How can they do
this?)
They should enforce tough standards. (This prescription may seem
counterintuitive. What is his rationale? Maybe to establish high
technical and product standards including environmental

Criticisms
Although Porter theory is renowned, it has
a number of critics.

Porter developed this paper based on

case studies and these tend to only apply

to developed economies.

Porter argues that only outward-FDI is

valuable in creating competitive

advantage, and inbound-FDI does not
increase domestic competition
significantly because the domestic firms