What are Porter’s Five Forces?

Introduction

Michael Porter was an academic business theorist who wrote on a wide variety of topics. One of the things that he wrote about during his very prolific career was his five forces model, which is one of the most commonly used frameworks in modern industry analysis. Below I’ll quickly summarize each one of the five forces.

Barriers to Entry

What’s preventing companies from entering the industry? Barriers to entry are everything that keep firms out of a particular industry. Reasons for high barriers to entry include government policy, startup costs, economies of scale being a huge advantage (this favors large and already established firms), etc.

Threat of Substitutes

How easily can the product being sold be replaced by a different product. For example, if soda got too expensive, or demand dropped for any reason, consumers could replace their consumption with juice, water, or any other beverage. This force is determined by how easily a consumer can switch to a product that is not part of the industry.

Competitive Environment

How intense is the competition between the firms within an industry? Is it extremely cutthroat or are things more relaxed? This force is determined by things such as the number of competitors, the costs of doing business, industry growth, etc.

Bargaining Power of Buyers

To what extent do individual buyers have the power to affect the industry? For example, if an industry has one million buyers, each buyer only has .0001% of the power. If an industry only has one buyer, then that buyer has 100% of the power. In the latter case the industry is so dependent on that one buyer that the firms within the industry have to provide more value to that buyer. Other things that affect the bargaining power of buyers is the number of substitute goods, and how easily those substitutes can be switched to.

Bargaining Power of Suppliers

To what extent do individual suppliers have the power to affect the industry? Every firm is dependent on a supplier that provides them the raw materials that they use to create the product that they sell. For example, if an industry has one million suppliers, each supplier only has .0001% of the power. If a supplier gets too expensive, the firms within an industry can just switch to another supplier. If an industry only has one supplier, then that supplier has 100% of the power. In the latter case the industry is so dependent on that one supplier that the firms within the industry have to pay whatever the supplier charges regardless of how much. Other things that affect the bargaining power of suppliers is the number of substitute raw materials, and how easily those substitutes can be switched to. Could a firm make their product out of a different raw material?


Fee Structure

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the entire account. So a person with a $750,000.01 account pays less than a person with a $750,000 account. I will waive personal tax return fees for accounts over $1 million. For accounts that are above $5,250,000, we’ll need to discuss a custom rate. 


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

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Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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