Pulp and Paper Industry

950 Words4 Pages
Michael Porter’s “Five Forces” Model
Summary and interpretation by Prof. Tony Lima February 25, 2006

Figure 1: Porter’s Five Forces From Michael Porter, Competitive Advantage, Simon & Schuster, New York, 1985, p. 5

Prof. Michael Porter teaches at the Harvard Business School. He has identified five forces that determine the state of competitiveness in a market. The forces also influence the profitability of firms already in the industry. These five forces are summarized in the above diagram. (The fifth force is the degree of rivalry that currently exists among firms already in the industry.) Here are a few additional details about Porter’s model.1 1. Barriers to Entry Economies of scale mean larger firms can produce at lower cost per
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“Porter’s Five Forces” by Prof. Lima February 25, 2006

Price of your product relative to total expenditures on all products. This is the fraction of total expenditure buyers spend on your products. The greater the fraction of total expenditure the greater the price elasticity of demand and the more bargaining power buyers have. Product differences refers to the degree of differentiation between your product and other products in the market. The greater the differentiation of your product, the lower its price elasticity of demand and the less bargaining power buyers have. Brand identity is the extent to which your brand name is recognized and sought out by buyers. The stronger your brand identity the less bargaining power buyers have. 5. Rivalry Determinants [with other firms in the industry] Industry growth is the speed at which the market is growing. Rapidly growing markets provide less incentive for firms to aggressively compete with each other. Intermittent overcapacity is the amount demand fluctuates during a year (or over a business cycle) and the impact lower demand has on how efficiently the firm is able to use its plant and equipment. In some industries a decrease in demand leads to significant idle productive capacity, while other industries are not as susceptible to this factor. More intense rivalry is likely to be fostered in an industry in which firms face either
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