tags: #publish links: [[Business Strategy and Competition]], [[Good Strategy, Bad Strategy - The Difference and Why It Matters (Richard Rumelt)]], created: 2022-03-04 Fri --- # Five Forces framework A framework to analyse competition dynamics and market structure - to think about competition intensity and competitive advantage, attractiveness, profitability of an industry or opportunity. See also [[PEST or PESTLE Analysis]] which is about the surrounding environment, rather than the competition properties of the market structure. Developed by Michael E Porter (Harvard Business School) in *Competitive Strategy: Techniques for Analyzing Industries and Competitors*, 1980. https://www.investopedia.com/terms/p/porter.asp From [[Good Strategy, Bad Strategy - The Difference and Why It Matters (Richard Rumelt)]] > A quick summary is that a terrible industry looks like this: the product is an undifferentiated commodity; everyone has the same costs and access to the same technology; and buyers are price sensitive, knowledgeable, and willing to switch suppliers at a moment’s notice to get a better deal. A lot of this is about how these factors affect *pricing power* and *moat*. See also [[Business Strategy and Competition]] for specific flavours of these factors. 1. **Competition in the industry** More competitors or more equivalent products = less pricing power, more movement. High-competition example: airlines. 2. **Potential of new entrants into the industry** Moat, barrier to entry. e.g. is your industry a regulated monopoly or has extreme setup costs, or could a new competitor appear in 2 months if the opportunity was attractive? 3. **(Pricing) Power of suppliers** Watch out for supply monopolies. Can you switch suppliers for your inputs? Is the supplier market unique or is it highly competitive? Apply this same model to the supplier market. Affects your input costs and stability. Classic example: Microsoft milked the PC industry because it was the only OS vendor. In fact Windows ticks all five boxes. 4. **Power of customers** Watch out for buyer monopolies. Can customers negotiate prices and deals with you? Can they force you to do things for them? Do you get hurt if you lose a customer? A small number of powerful valuable customers leaves you less power than a large number of small easily-replaced customers. Note: you need to think about both the power of the end customer (e.g. the public) and your immediate customer, if different. For example, if you're a wholesaler selling to a supermarket monopoly, they have massive price-setting power over you and will squeeze your margins, even if the end customer is willing to pay well for your unique product. 5. **Threat of substitute products** Switching costs. Moat. Do customers have a choice? Is this a unique hard-to-replace platformy network-effecty product integrated with 10 other non-replaceable services, or is it a commodity where price is the only thing that matters? Note point 2 is about whether anyone else can participate in the industry at all, and this point 5 is about whether anything stops them replacing your specific product.