This weeks lecture discusses another one of Porter\'s models, i.e. the five-forc

Question

This weeks lecture discusses another one of Porter's models, i.e. the five-forces model.The key of this model is, as explained in the lecture, that it was designed/developed to understand why some industries are more profitable than other industries. Porter came up with five forces that influence an industry's profitability.

Let's explore this a little. How can we 'apply' the five-forces model? Can we for example find some industries with high profitability and low profitability and show through the application of the five forces why this may be the case? Why is it even important to know this? And, can the five forces in a particular industry be different in different nations?

Explanation / Answer

Porter’s model is a framework for analysing the nature of competition within an industry. Every market or industry is different and should be able to find differences between them in terms of size, structure, distribution channels, consumer needs and wants and so on. The differences is that industries vary in terms of how much profits they make.

Let’s take two examples, Airlines and Soft drinks. We must think why airlines make so little profit. Regarding price, it is very intensive competitor rivalry, low barriers to entry, suppliers of aircraft and equipment are powerful, has high fixed costs, and customers have lots of substitute options. By contrast, in soft drinks market, customers and suppliers have very little power, there is high brand awareness, and high barriers to entry.

Porter identified five factors that determine the nature of competition within an industry such as threat of new entrants to a market, bargaining power of suppliers, bargaining powers of customers, threat of substitute products, and degree of competitor rivalry. He identified that high or low industry profits (e.g. soft drinks v airlines) are associated with these characteristics.

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