Developed by Harvard Business School professor Michael Porter in his book Competitive Strategy, the Porter''s Five Forces framework helps determine the attractiveness of an industry. Before any company expands into new markets, divests product lines, acquires new businesses, or sells divisions, it should ask itself, "Is the industry we''re entering or exiting attractive?" By using Porter''s Five Forces, a company can begin to develop a thoughtful answer. Consultants frequently utilize Porter''s Five Forces as a starting point to help companies evaluate industry attractiveness.
Take, for example, entry into the copy store market (like Kinko''s). How attractive is the copy store market?
Potential entrants: What is the threat of new entrants into the market? Copy stores are not very expensive to open - you can conceivably open a copy store with one copier and one employee. Therefore, barriers to entry are low, so there''s a high risk of potential new entrants.
Buyer power: How much bargaining power do buyers have? Copy store customers are relatively price sensitive. Between the choice of a copy store that charges 5 cents a copy and a store that charges 6 cents a copy, buyers will usually head for the cheaper store. Because copy stores are common, buyers have the leverage to bargain with copy store owners on large print jobs, threatening to take their business elsewhere. The only mitigating factors are location and hours. On the other hand, price is not the only factor. Copy stores that are willing to stay open 24 hours may be able to charge a premium, and customers may simply patronize the copy store closest to them if other locations are relatively inconvenient.