Methods and concepts for Value Based Management (VBM)
Porter
The Five Forces model of Porter is an outside-in business unit strategy tool that is used to make an analysis of
the attractiveness (value...) of an industry structure. The Competitive Forces analysis is made by the
identification of 5 fundamental competitive forces:
- the entry of competitors (how easy or difficult is it for new entrants to start to compete, which barriers do exist)
- the threat of substitutes (how easy can our product or service be substituted, especially cheaper)
- the bargaining power of buyers (how strong is the position of buyers, can they work together to order large volumes)
- the bargaining power of suppliers (how strong is the position of sellers, are there many or only few potential suppliers, is there a monopoly)
- the rivalry among the existing players (is there a strong competition between the existing players, is one player very dominant or all all equal in strength/size)
- as a sixth factor could be added: government.
Porter's competitive forces model is probably one of the most often used business strategy tools and has
proven its usefulness on numerous occasions. Porter's model is particularly strong in thinking outside-in. Care
should therefore be taken not to underestimate or underemphasize the importance of the (existing) strengths of
the organization (inside-out) when applying this five competitive forces framework of Porter.
From a Value Based Management point of view, the Five Forces model (Market/Industry Attractiveness) of Porter
can be seen as one of two dimensions in maximizing corporate value creation. The other value creation dimension
is how well a company performs relatively towards its competitors (Relative Competitive Position), for which two
other Porter-models are frequently used: the Value Chain framework and Porter's Competitive Advantage.