Industry Analysis: Porter’s Five Forces

Michael Porter came up with the 5 forces (Porter’s five forces) to analyze what industry factors external to a company can influence the company. For the 5 forces below, reflect to what extent the following statements are reflective of your company’s industry and IKEA.

1 – Suppliers’ bargaining power

  • Suppliers play a minor role in value chains in the industry.
  • There is a wide array of suppliers to choose from.
  • Businesses can easily switch suppliers.
  • The cost of switching is negligible.
  • Suppliers are highly unlikely to bypass a company to directly deal with the customer.

2 – Buyers’ bargaining power:

  • The number of buyers greatly outnumbers that of sellers.
  • The buyer will incur a significant cost if they switch.
  • The product / service is critical for the buyer.
  • The buyers don’t purchase in bulk.

3 – Threat of Substitutes

  • There are few substitute products.
  • Substitutes are relatively expensive.
  • The substitute’s quality is noticeably worse.
  • Costs of switching to a substitute are high.

 

4 – Threat of new Entrants

  • Capital requirements for entry are prohibitive.
  • Existing companies benefit greatly from economies of scale.
  • There is severely limited access to distribution channels.
  • Incumbents are way ahead .

5  -Competitive Rivalry

  • Aggregate industry growth is sluggish.
  • Margins are low.
  • Products and services are already highly differentiated.
  • Incumbent competitors are greatly experienced and developed.

 

Now watch an analysis of IKEA according  to Porter’s five forces to see if you agree:

 

 

EXTRA Analysis: Industry

One criticism Porter has of how his forces analysis is used is that people apply it to companies, we we did above with IKEA, and not to the whole industry. Apply the five forces to the sneakers industry (Nike, Reebok, Adidas, Converse, Puma etc..) then watch the video below to compare:

 

1. Competition in the industry

2. Potential of new entrants into the industry

3. Power of suppliers

4. Power of customers

5. Threat of substitute products

 

 

 

Further practice:

Do your own analysis of Starbucks, Coca-Cola and Apple then compare with the links below

Starbucks

Coca-Cola:

Apple:

 

 

Vocabulary test:

 

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