Industry Analysis: Porter's Five Forces Model | Strategic Management | From A Business Professor

Summary

In this video, we explore Michael Porter's Five Forces model, a fundamental framework for understanding industry competition and profitability. The model analyzes the threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products, and rivalry among existing competitors. By examining these forces, businesses can strategize to leverage opportunities and mitigate threats, ultimately aiming to gain and sustain a competitive advantage in their respective industries.

Takeaways

• 😀 Michael Porter's Five Forces Model is a framework for analyzing the competitive landscape of an industry.
• 🔒 The Threat of Entry refers to the potential for new competitors to enter the market, which can decrease industry profitability.
• 🏭 Economies of Scale can act as a barrier to entry, benefiting incumbent firms by allowing them to spread costs over more units and negotiate better terms with suppliers.
• 🌐 Network Effects can deter new entrants by increasing the value of a product or service as more people use it, as seen in social networks like LinkedIn.
• 💼 High Customer Switching Costs can serve as a barrier to entry, as significant effort and resources are required to change suppliers, benefiting firms like Intuit Inc.
• 💰 Capital Requirements can deter new entrants by necessitating substantial investments to compete in an industry, often linked to economies of scale.
• 🛠 Advantages Independent of Size can be a barrier for new entrants, as incumbent firms may possess proprietary technology, brand loyalty, or other unique advantages.
• 🛍️ The Power of Buyers influences industry profitability, with powerful buyers able to demand lower prices or higher quality, affecting firm revenue and costs.
• 🛒 The Threat of Substitutes impacts industry competitiveness and profitability, as the availability of substitute products can increase competition.
• 🏁 Rivalry Among Existing Competitors is influenced by factors like industry structure, growth, strategic commitments, and exit barriers, shaping the intensity of competition.

Q & A

What is the Five Forces Model developed by Michael Porter?

The Five Forces Model is a framework created by Harvard Business School professor Michael Porter to analyze the competitive landscape of an industry and understand the profit potential. It consists of five forces: threat of entry, power of suppliers, power of buyers, threat of substitutes, and rivalry among existing competitors.

How does the threat of entry affect industry profit potential?

The threat of entry can depress industry profit potential by two major ways: first, by the potential of additional capacity coming into the industry, which may lead incumbent firms to lower prices to deter new entrants, and second, by forcing incumbent firms to spend more to retain their customers, which reduces profit potential if they can't raise prices.

What are some barriers to entry that can reduce the threat of new competitors?

Barriers to entry that can reduce the threat of new competitors include economies of scale, network effects, customer switching costs, capital requirements, and advantages independent of size.

How do network effects influence the threat of potential entry in an industry?

Network effects describe the positive impact that one user of a product or service has on the value of that product or service for other users. When network effects are present, the value of the product or service increases with the number of users, which can reduce the threat of potential entry.

What is the significance of customer switching costs as a barrier to entry?

Customer switching costs are one-time sunk costs incurred when moving from one supplier to another. High switching costs can be a significant barrier to entry because they make it difficult for new entrants to attract customers away from established firms.

How does the power of suppliers impact an industry's profit potential?

The power of suppliers can reduce an industry's profit potential by exerting pressures on firms to accept higher input costs or lower quality inputs. Suppliers are more powerful when their industry is more concentrated, they don't rely heavily on the industry for revenues, or when switching costs for buyers are high.

What factors contribute to the power of buyers in an industry?

The power of buyers is high when there are few buyers who purchase large quantities, the industry's products are standardized, buyers face low switching costs, and they can credibly threaten to backwardly integrate into the industry.

How does the threat of substitutes affect the competitive environment within an industry?

The threat of substitutes affects the competitive environment by making the industry more competitive and decreasing profit potential when close substitutes are available. Conversely, the lack of close substitutes can make an industry less competitive and increase profit potential.

What are the four competitive industry structures as described by Porter's Five Forces Model?

The four competitive industry structures are perfect competition, monopolistic competition, oligopoly, and monopoly. Each structure is characterized by the number and size of competitors, the degree of product differentiation, the ease of entry, and the pricing power of firms.

How do exit barriers influence the intensity of rivalry among existing competitors?

Exit barriers are obstacles that prevent a company from leaving a market. High exit barriers can lead to excess capacity remaining in the industry, which reduces profit potential as firms struggle to compete. Low exit barriers allow underperforming firms to exit more easily, reducing competitive pressure.

What strategic position should managers craft for their companies based on the Five Forces Model?

Managers should craft a strategic position that leverages weak forces into opportunities and mitigates strong forces, which are potential threats to the firm's ability to gain and sustain a competitive advantage.

Outlines

00:00

🏭 Understanding Industry Dynamics Through Porter's Five Forces

This paragraph introduces the concept of an industry and the Five Forces model developed by Michael Porter. The Five Forces model is a framework for analyzing the competitive landscape of an industry and the profitability of firms within it. The forces include the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, the threat of substitute products or services, and the intensity of competitive rivalry. The paragraph explains how these forces interact and influence industry attractiveness and profitability, and how incumbent firms can use the model to gain a competitive advantage.

05:01

🛠️ Analyzing Barriers to Entry and Their Impact on Industry Competition

This section delves into the first of Porter's Five Forces: the threat of entry. It discusses how potential new competitors can affect industry profit potential by increasing capacity and forcing incumbent firms to lower prices or increase spending to retain customers. The paragraph then outlines various barriers to entry that can protect incumbent firms from new competition, such as economies of scale, network effects, customer switching costs, capital requirements, and advantages independent of size. Each type of barrier is explained with examples, illustrating how they can be leveraged by existing firms to maintain their market position.

10:02

✈️ The Influence of Supplier Power on Industry Profitability

The second force, the power of suppliers, is explored in this paragraph. It explains how suppliers can impact an industry's profitability by raising input costs or reducing input quality. The bargaining power of suppliers is influenced by factors such as industry concentration, dependency on the industry, switching costs, product differentiation, availability of substitutes, and the threat of forward integration. The example of Boeing and Airbus as powerful suppliers to the airline industry is used to illustrate the concept, highlighting how their market position allows them to exert significant influence over the profitability of airlines.

15:03

💼 Buyer Power and Its Effects on Industry Competition

This paragraph focuses on the third force: the power of buyers. It discusses how buyers can pressure producers to lower prices or increase product quality, affecting the industry's profit margins. The power of buyers is high when there are few buyers, the industry's products are standardized, buyers face low switching costs, and when buyers can credibly threaten to integrate backward. The example of Costco is provided to demonstrate the impact of buyer power, showing how its large-scale purchases and market influence can lead to significant pressure on suppliers to lower prices and improve quality.

20:04

🌐 The Threat of Substitutes and Its Role in Shaping Industry Competition

The fourth force, the threat of substitutes, is the subject of this paragraph. It describes how the availability of substitute products can increase competition within an industry and decrease its profit potential. Substitutes are products from other industries that offer similar benefits to consumers, making the industry more competitive. Examples of substitutes for various industries are given, such as smartphones for digital cameras, online shopping for brick-and-mortar stores, and the potential for self-driving vehicles to substitute human delivery drivers. The paragraph emphasizes the importance of understanding and addressing the threat of substitutes to maintain industry competitiveness.

🚀 Rivalry Among Competitors and Its Impact on Industry Profitability

This paragraph examines the fifth and final force: rivalry among existing competitors. It outlines how the intensity of this rivalry is influenced by factors such as industry structure, growth, strategic commitments, and exit barriers. The paragraph discusses the four main competitive industry structures: perfect competition, monopolistic competition, oligopoly, and monopoly, providing examples for each. It also explains how industry growth can affect competition, with high growth leading to less rivalry and low growth intensifying it. The impact of strategic commitments and exit barriers on the intensity of rivalry is also discussed, with examples illustrating how these factors can lead to more or less intense competition.

🔍 Crafting Strategy Based on Porter's Five Forces

The concluding paragraph summarizes the Five Forces model and its importance for managers in understanding industry profit potential and positioning their firms for competitive advantage. It emphasizes the need for managers to leverage weak forces as opportunities and mitigate strong forces as threats. The paragraph invites viewers to consider how the model can be applied to industries of their interest and encourages discussion and engagement through comments and subscriptions.

Keywords

💡Five Forces Model

The Five Forces Model is a framework developed by Michael Porter to analyze the competitive landscape of an industry. It is central to the video's theme as it helps businesses understand the profit potential and strategize for competitive advantage. The model considers five key forces: threat of entry, power of suppliers, power of buyers, threat of substitutes, and rivalry among existing competitors. Each force is examined in detail throughout the script to illustrate how they influence industry dynamics.

💡Threat of Entry

The 'threat of entry' refers to the potential for new competitors to enter an industry, which can affect the profitability of existing firms. In the video, this concept is explained as a force that can reduce industry profit potential by inciting price wars or forcing incumbents to increase spending to retain customers. Examples include barriers to entry like economies of scale and network effects, which can deter new entrants and protect industry profits.

💡Power of Suppliers

This term describes the influence that suppliers have over an industry, particularly in terms of pricing and quality of inputs. The video explains how powerful suppliers can reduce an industry's profit potential by demanding higher prices or lower quality, which increases production costs. An example given is the relationship between Boeing and Airbus as suppliers to the airline industry, where their concentrated industry gives them significant bargaining power.

💡Power of Buyers

The 'power of buyers' indicates the ability of customers to negotiate for lower prices or higher quality, which can squeeze the profit margins of producers. The video discusses how this power is heightened when buyers are few, purchase in large quantities, or face low switching costs. Costco is used as an example of a buyer with significant power due to its large-scale purchases and ability to influence supplier pricing.

💡Threat of Substitutes

The 'threat of substitutes' pertains to the risk that consumers may choose alternative products that offer similar benefits. The video explains how the availability of substitutes can intensify competition and reduce profitability within an industry. Examples provided include smartphones as substitutes for digital cameras and online shopping as a substitute for physical retail stores.

💡Rivalry Among Existing Competitors

This concept refers to the competitive actions within an industry as firms vie for market share and profitability. The video outlines how the intensity of this rivalry is influenced by factors such as industry structure, growth, strategic commitments, and exit barriers. The competitive industry structures like perfect competition, monopolistic competition, oligopoly, and monopoly are discussed to illustrate different levels of rivalry.

💡Economies of Scale

Economies of scale are cost advantages that arise when larger output allows firms to spread fixed costs over more units, achieve better terms with suppliers, and operate more efficiently. The video uses this concept to explain how incumbent firms can deter new entrants by benefiting from lower per-unit costs, thereby making it difficult for smaller or new firms to compete on price.

💡Network Effects

Network effects occur when the value of a product or service increases with the number of users. The video explains how network effects can act as a barrier to entry by making it more difficult for new firms to compete with established players that have a large user base. LinkedIn is given as an example where the value of the platform increases as more professionals join.

💡Customer Switching Costs

Customer switching costs are one-time costs incurred when a buyer moves from one supplier to another. The video discusses how high switching costs can act as a barrier to entry, as they make it costly for customers to change suppliers. Intuit Inc. and its bookkeeping software are used as an example where the time and effort required to learn new software create significant switching costs.

💡Capital Requirements

Capital requirements refer to the financial investments needed to enter a new industry, including costs for setting up operations, machinery, and covering initial losses. The video explains that high capital requirements can deter new entrants, as they need substantial funds to compete. However, it also notes that capital is a fungible resource that can be acquired, suggesting that while it may act as a barrier, it is not as strong as other entry barriers.

💡Advantages Independent of Size

These are cost and quality advantages that incumbent firms possess regardless of their size. The video discusses how these advantages can stem from factors like brand loyalty, proprietary technology, and preferential access to resources. These advantages can be difficult for new entrants to replicate, thus acting as a barrier to entry and protecting the incumbent's competitive position.

Highlights

An industry comprises companies offering similar products or services to meet specific customer needs.

Michael Porter's Five Forces Model is a tool for understanding industry profit potential and competitive advantage.

The Threat of Entry refers to the risk of new competitors entering the industry, which can reduce profit potential.

Barriers to entry, such as economies of scale, can protect incumbent firms from new competition.

Network effects can deter new entrants by increasing the value of a product with more users.

Customer switching costs can act as a barrier to entry, benefiting firms with unique products.

Capital requirements can deter new entrants, especially when related to economies of scale.

Advantages independent of size can create entry barriers based on brand loyalty and proprietary technology.

The power of suppliers can influence an industry's profitability through their bargaining power.

Suppliers with differentiated products and low availability of substitutes can exert significant power.

The power of buyers is high when they can demand lower prices or higher quality, affecting producers' margins.

Buyers with significant purchase power, such as Costco, can pressure suppliers to lower prices.

The threat of substitutes can decrease an industry's profit potential if consumers have alternative options.

Rivalry among existing competitors is influenced by industry structure, growth, strategic commitments, and exit barriers.

Competitive industry structures range from perfect competition to monopoly, affecting pricing power and profitability.

Industry growth can either reduce or intensify rivalry among competitors, depending on the market expansion.

Strategic commitments can lead to intense rivalry as firms are less likely to exit the industry.

High exit barriers can keep excess capacity in the market, reducing industry profit potential.

Managers should leverage weak forces and mitigate strong forces to gain and sustain competitive advantage.

Transcripts

hello everyone welcome to business

school 101.

an industry is a group of incumbent

companies facing more or less the same

set of suppliers and buyers

firms competing in the same industry

tend to offer similar products or

services to meet specific customer needs

harvard business school professor

michael porter developed a highly

influential five forces model to help

managers understand the profit potential

of different industries and how they can

position their respective firms to gain

and sustain competitive advantage

those forces are threat of entry

power of suppliers

power of buyers

threats of substitutes

and rivalry among existing competitors

so let us analyze those five forces

individually

force number one the threat of entry

the threat of entry describes the risk

that potential competitors will enter

the industry

potential new entry depresses industry

profit potential in two major ways

first with the threat of additional

capacity coming into an industry

incumbent firms may lower prices to make

entry appear less attractive to the

potential new competitors which would in

turn reduce the overall industry's

profit potential especially in

industries with slow or no overall

growth in demand

second the threat of entry by additional

competitors may force incumbent firms to

spend more to satisfy their existing

customers this spending reduces an

industry's profit potential especially

if firms can't raise prices

as we know the more profitable in

industry the more attractive it is for

new competitors to enter

however there are a number of important

barriers to entry that raise the cost

for potential competitors and reduce the

threat of entry

entry barriers which are advantageous

for incumbent firms are obstacles that

determine how easily a firm can enter an

industry

incumbent firms can benefit from several

important sources of entry barriers

those barriers are economies of scale

network effects customer switching costs

capital requirements and advantages

independent of size

one economies of scale

economies of scale are cost advantages

that accrue to firms with larger output

because they can spread fixed costs over

more units employee technology more

efficiently benefit from a more

specialized division of labor and demand

better terms from their suppliers

these factors in turn drive down the

cost per unit allowing large incumbent

firms to enjoy a cost advantage over new

entrants who cannot muster such scale

two

network effects

network effects describe the positive

effect that one user of a product or

service has on the value of that product

or service for other users

when network effects are present the

value of the product or service

increases with the number of users

the threat of potential entry is reduced

when network effects are present

social networks are the clearest example

of this take linkedin

which grew through memberships as

linkedin started to get broader adoption

the numbers grew exponentially as the

utility of the product became stronger

three

customer switching costs

switching costs are incurred by moving

from one supplier to another

changing vendors may require the buyer

to alter product specifications retrain

employees and modify existing processes

switching costs are one-time sunk costs

which can be quite significant and a

formidable barrier to entry

for example companies that create unique

products that have few substitutes and

require significant effort to perfect

their use enjoy significant switching

costs

consider intuit inc which offers its

customers various bookkeeping software

solutions such as turbotax quickbooks

and mint

because learning to use intuits

applications take significant time

effort and training costs

fewer users are willing to switch away

from intuit

4. capital requirements

capital requirements describe the price

of the entry ticket into a new industry

how much capital is required to compete

in this industry and which companies are

willing and able to make such

investments

frequently related to economies of scale

capital requirements may encompass

investments to set up plans with

dedicated machinery run a production

process and cover startup losses

however please keep in mind that capital

unlike proprietary technology and

industry-specific know-how is a fungible

resource that can be relatively easily

acquired in the face of attractive

returns

five advantages independent of size

incumbent firms often possess cost and

quality advantages that are independent

of size

these advantages can be based on brand

loyalty proprietary technology

preferential access to raw materials and

distribution channels favorable

geographic locations and cumulative

learning and experience effects

in addition incumbent firms often

benefit from cumulative learning and

experience effects accrued over long

periods of time

attempting to obtain such deep knowledge

within a shorter time frame is often

costly if not impossible which in turn

constitutes a formidable barrier to

entry

the second force in porter's model is

the power of suppliers the bargaining

power of suppliers captures pressures

that industry suppliers can exert on an

industry's profit potential

this force reduces a firm's ability to

obtain superior performance because

powerful suppliers can raise the cost of

production by demanding higher prices

for their inputs or by reducing their

quality of the input factor or service

level delivered

to compete effectively companies

generally need a wide variety of inputs

into the production process including

raw materials and components

labor and services

the relative bargaining power of

suppliers is high under following

scenarios

one the suppliers industry is more

concentrated than the industry it sells

to

two suppliers do not depend heavily on

the industry for a large portion of

their revenues three incumbent firms

face significant switching costs when

changing suppliers

four suppliers offer products that are

differentiated

five there are no readily available

substitutes for the products or services

that the suppliers offer

and six suppliers can credibly threaten

to forward integrate into the industry

let's take a closer look at one

important supply group to the airline

industry

boeing and airbus the makers of large

commercial jets

the reason airframe manufacturers are

powerful suppliers to airlines is

because their industry is much more

concentrated than the industry it sells

to

compared to two airframe suppliers there

are hundreds of commercial airlines

around the world

in addition the airlines face

non-trivial switching costs when

changing suppliers because pilots and

crew would need to be retrained to fly a

new type of aircraft maintenance

capabilities would need to be expanded

and some routes may need to even be

reconfigured due to differences in

aircraft range and passenger capacity

moreover while some of the aircraft can

be used as substitutes boeing and airbus

offer differentiated products

thus the supplier power of commercial

aircraft manufacturers is quite

significant

this puts boeing and airbus in a strong

position to extract profits from the

airline industry thus reducing the

profit potential of the airline

themselves

force 3 the power of buyers

the bargaining power of buyers is the

flip side of the bargaining power of

suppliers

buyers are the customers of an industry

the power of buyers concerns the

pressure in industries customers can put

on the producers margins and the

industry by demanding a lower price or

higher product quality

when buyers successfully obtain price

discounts it reduces a firm's revenue

when buyers demand higher quality and

more service it generally raises

production costs

the power of buyers is high when there

are few buyers and each buyer purchases

large quantities relative to the size of

a single seller

the industry's products are standardized

or undifferentiated commodities

buyers face low or no switching costs

and buyers can credibly threaten to

backwardly integrate into the industry

in addition

companies need to be aware of situations

when buyers are especially price

sensitive

this is the case when

one the buyer's purchase represents a

significant fraction of its cost

structure or procurement budget

two buyers earn low profits or are

strapped for cash

three the quality or cost of the buyer's

products and services is not affected

much by the quality or cost of their

inputs

the retail giant costco provides a

potent example of tremendous buyer power

costco is not only one of the largest

retailers worldwide but it is also one

of the world's fortune 500 companies

costco is one of the few large big box

global retail chains and frequently

purchases large quantities from its

suppliers

costco leverages its buyer power by

exerting tremendous pressure on its

supplier to lower prices and to increase

quality or risk losing access to shelf

space at their worldwide stores

force 4 the threat of substitutes

porter's threat of substitutes

definition is the availability of a

product that the consumer can purchase

instead of the industry's product

a substitute product is a product from

another industry that offers similar

benefits to the consumer as the product

produced by the firms within the

industry

the threat of substitution in an

industry affects the competitive

environment for the firms in that

industry and influences those firms

ability to achieve profitability

the availability of close substitute

products can make an industry more

competitive

and decrease profit potential for the

firms in the industry

on the other hand the lack of close

substitute products makes an industry

less competitive and increases profit

potential for the firms in the industry

here are some examples of substitutes

for digital cameras substitutes are

smartphones

for traditional brick and mortar stores

substitutes are online shopping websites

for human delivery drivers

substitutes could be advanced

self-driving vehicles in the future

force 5

rivalry among existing competitors

rivalry among existing competitors

describes the intensity with which

companies within the same industry

jockey for market share and

profitability

the intensity of rivalry among existing

competitors is determined largely by the

following four factors

competitive industry structure

industry growth

strategic commitments and exit barriers

factor one competitive industry

structure

the competitive industry structure

refers to elements and features common

to all industries

the structure of an industry is largely

captured by the number and size of its

competitors

the firm's degree of pricing power

the type of product or service and the

height of entry

barriers the four main competitive

industry structures are

perfect competition

monopolistic competition

oligopoly

monopoly

let us discuss these separately

first perfect competition

a perfect competitive industry is

fragmented and has many small firms a

commodity product ease of entry and

little or no ability for each individual

firm to raise its prices

the firms competing in this type of

industry are approximately similar in

size and resources

consumers make purchasing decisions

solely on price because the commodity

product offerings are more or less

identical

the resulting performance of the

industry shows low profitability

although perfect competition is a rare

industry structure in its pure form

markets for commodities such as natural

gas copper and iron tend to approach

this structure

second monopolistic competition

a monopolistically competitive industry

has many firms a differentiated product

some obstacles to entry and the ability

to raise prices for a relatively unique

product while retaining customers

the key to understanding this industry

structure is that the firms now offer

products or services with unique

features

the global smartphone industry provides

one example of monopolistic competition

many firms compete in this industry and

even the largest of them such as samsung

apple xiaomi huawei or vivo have less

than 20 percent market share

moreover

while products between competitors tend

to be similar they are by no means

identical

as a consequence firms selling a product

with unique features tend to have some

ability to raise prices

when a firm is able to differentiate its

product or service offerings it carves

out a niche in the market in which it

has some degree of monopolistic power

over pricing

thus the name monopolistic competition

firms frequently communicate the degree

of product differentiation through

advertising

third oligopoly

an oligopolistic industry is

consolidated with a few large firms

differentiated products high barriers to

entry and some degree of pricing power

the degree of pricing power depends just

as in monopolistic competition on the

degree of product differentiation

a key feature of an oligopoly is that

the competing firms are interdependent

with only a few competitors in the mix

the actions of one firm influence the

behaviors of the other

therefore each competitor in an

oligopoly must consider the strategic

actions of the other competitors this

type of industry structure is often

analyzed using game theory which

attempts to predict strategic behaviors

by assuming that the moves and reactions

of competitors can be anticipated

due to their strategic interdependence

companies and oligopolies have an

incentive to coordinate their strategic

actions to maximize joint performance

examples of oligopolies include the soft

drink industry coca-cola versus pepsi

airframe manufacturing business

boeing versus airbus

home improvement retailing the home

depot versus lowe's

operating systems for smartphones

apple ios and google android and

detergents

png versus unilever

fourth monopoly

an industry is a monopoly when there is

only one firm supplying the market

the firm may offer a unique product and

the challenges to moving into the

industry tend to be high

the monopolist has considerable pricing

power as a consequence

firm and thus industry profit tends to

be high

a classic example of a monopoly based on

resource control is d beers

d beers consolidated mines were founded

in 1888 in south africa as an

amalgamation of a number of individual

diamond mining operations

d beers had a monopoly over the

production of diamonds for most of the

20th century

and it used its dominant position to

manipulate the international diamond

market it convinced independent

producers to join its single-channel

monopoly

d-beers also purchased and stockpiled

diamonds produced by other manufacturers

in order to control prices through

supply

the de beers model changed at the turn

of the 21st century when diamond

producers from russia canada and

australia started to distribute diamonds

outside of the beer's channel

the sale of diamonds also suffered from

rising awareness about blood diamonds de

beers market share fell from as high as

90 percent in the 1980s to less than 40

percent in 2012.

the second factor affecting the

intensity of rivalry among existing

competitors is industry growth industry

growth directly affects the intensity of

rivalry among competitors

in periods of high growth

consumer demand rises and price

competition among firms frequently

decreases

because the pie is expanding rivals are

focused on capturing part of that larger

pie rather than taking market share and

profitability away from one another

in contrast

rivalry among competitors becomes fierce

during slow or even negative industry

growth

price discounts frequent new product

releases with minor modifications

intense promotional campaigns and fast

retaliation by rivals are all tactics

indicative of an industry with slow or

negative growth

competition is fierce because rivals can

gain only at the expense of others

therefore companies are focused on

taking business away from one another

the third factor affecting the intensity

of rivalry among existing competitors is

strategic commitments

if firms make strategic commitments to

compete in an industry rivalry among

competitors is likely to be more intense

we define strategic commitments as firm

actions that are costly long-term

oriented and difficult to reverse

strategic commitments to a specific

industry can stem from large fixed cost

requirements but also from non-economic

considerations

for example airbus was created by a

number of european governments through

direct subsidies to provide

countervailing power to boeing

the european union in turn claims that

boeing is subsidized by the us

government indirectly via defense

contracts

given these political considerations and

large-scale strategic commitments

neither airbus or boeing is likely to

exit the aircraft manufacturing industry

even if industry profit potential falls

to zero

the last factor affecting the intensity

of rivalry among existing competitors is

exit barriers barriers to exit are

obstacles or impediments that prevent a

company from exiting a market in which

it is considering cessation of

operations or from which it wishes to

separate

typical barriers to exit include highly

specialized assets which may be

difficult to sell or relocate and high

exit costs such as asset write-offs and

closure costs

a common barrier to exit can also be the

loss of customer goodwill an industry

with low exit barriers is more

attractive because it allows

underperforming firms to exit more

easily

such exits reduce competitive pressure

on the remaining firms because excess

capacity is removed in contrast an

industry with high exit barriers reduces

its profit potential because excess

capacity still remains

okay let's wrap up today's topic

harvard business school professor

michael porter developed the highly

influential five forces model to help

managers understand the profit potential

of different industries and how they can

position their respective firms to gain

and sustain competitive advantage

these five forces are threat of entry

power of suppliers power of buyers

threat of substitutes and rivalry among

existing firms

generally the stronger those forces the

lower the firm's ability to gain and

sustain a competitive advantage

conversely the weaker those forces the

greater the firm's ability to gain and

sustain competitive advantage

therefore managers need to craft a

strategic position for the company that

leverages weak forces into opportunities

and mitigates strong forces because they

are potential threats to the firm's

ability to gain and sustain a

competitive advantage

so what do you think about porter's five

forces model

can you apply this model to an industry

you are interested in

please leave your thoughts in a comment

below if you liked this video please

make sure to give it a thumbs up and

subscribe to the channel

thanks for watching and i will see you

next time