Following on from his work analyzing the competitive forces in an industry, Michael Porter suggested four “generic” business strategies that could be adopted in order to gain competitive advantage. The four strategies relate to the extent to which the scope of a businesses’ activities are narrow versus broad and the extent to which a business seeks to differentiate its products. The four strategies are summarized in the figure below: Porter’s Five Forces : The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries.
However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure. Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates Diagram of Porter’s 5 Forces Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation
Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry