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Porter's Five Forces

Michael Porter's framework for industry analysis. A useful tool for assessing the structural profitability potential of an industry. Note: it is a sanity check, not the primary moat analysis. Used in combination with the 7-Powers / Greenwald frameworks.

The five forces

1. Threat of new entry

  • Capital requirements
  • Economies of scale
  • Brand / customer loyalty
  • Regulatory / licensing barriers
  • Access to distribution
  • Switching costs for customers
  • Patents and proprietary tech
  • Learning curve and proprietary knowledge

2. Bargaining power of suppliers

  • Concentration of suppliers
  • Switching costs for the firm
  • Importance of input
  • Forward integration potential
  • Backward integration alternatives

3. Bargaining power of buyers

  • Customer concentration
  • Standardized vs. specialized product
  • Switching costs for customers
  • Forward integration by customers
  • Price sensitivity

4. Threat of substitutes

  • Substitute products / services exist
  • Price-performance tradeoff
  • Switching cost between original and substitute
  • Buyer propensity to substitute

5. Competitive rivalry

  • Number of competitors
  • Industry growth rate
  • Fixed cost intensity
  • Differentiation
  • Switching cost between competitors
  • Exit barriers

When this framework adds value

Most useful for:

  • New industries the analyst is learning
  • Macro-level analysis of an entire sector
  • Identifying where rent should accumulate vs. where it doesn't
  • Cross-checking moat work with industry-structure work

Less useful for:

  • Firm-specific analysis (use moat work)
  • Highly disrupted industries (the static framework misses dynamics)
  • Two-sided markets (need network effects layered)

Output

For each force, score:

  • Strong (force is unfavorable for incumbents)
  • Moderate
  • Weak (force is favorable for incumbents)

An industry where multiple forces are weak for incumbents tends to be structurally profitable. Where multiple are strong, structurally unprofitable.

The deep-value angle: occasionally a sector with multiple weak forces (favorable to incumbents) trades at multiples that imply strong forces. The mispricing arises from narrative or macro pessimism unmatched by structural reality.

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