Porter's Five Forces: Industry level analysis
Porter’s Five Forces is a framework for undertaking industry-level analysis. It helps explain why certain industries are more profitable than others. The analysis examines five ‘forces’, considering why these dimensions are likely to result in some industries being more profitable than others:
- Buyer Power: Whether buyers are able to lower the prices
- Supplier Power: Whether suppliers are able to push up the costs of inputs
- Threat of New Entrants: Whether new firms can easily enter the industry, threatening industry profitability
- Threat of Substitutes: Are there similar products from other industries that companies indirectly compete with
- Inter-industry Rivalry: Do firms compete with one another directly, particularly on price, which can impact industry profitability
VRIO analysis: Firm level analysis
While Porter’s Five Forces seeks to analysis industry profitability, the VRIO analysis seeks to explain differences between the profitability of firms operating in the same industry. The analysis focuses on the underlying resources of the firms, helping to explain why some firms are able to obtain a sustainable competitive advantage over others in the same industry.
The components of the VRIO framework include:
- Valuable: Does this resource help the firm enact its strategy?
- Rare: Is the resource relatively rare, if some setting the firm apart from others?
- Hard to Imitate or Substitute: If the resource is rare, would it be difficult for other firms to acquire a comparable resource by imitating or substituting it?
- Organizationally set up to capture the value: Is the firm organizationally set up to capture the value?
The difference between Porter's Five Forces and VRIO analysis
The key difference between Porter’s Five Forces and VRIO analysis is the different level of profitability that the analysis seeks to explain. Porter’s Five Forces helps explain industry level difference in profitability – why certain industries are more profitable than others. In comparison, the VRIO analysis helps explain within-industry profitability, why certain firms are more profitable than others, based on differences in their underlying resources.
Porter’s Five Forces and the VRIO analysis also are different in the extent to which they emphasize firm differences. Porter’s Five Forces treats firms within an industry as being relatively comparable to one another – the five forces impact all firms roughly comparably. In comparison, the VRIO framework is specifically concerned with differences between firms operating within the same industry.