Porters Five Forces Analysis

Used to assess the attractiveness of a stock sector

Porters Five Forces analysis, developed by Professor Michael Porter at the Harvard Business School in the late 1970's, is commonly used to analyze the attractiveness of a stock sector.

The process can be thought of as one level down from a top-down approach to a stock selection strategy, or one level up from a bottom-up approach.

It is often used in conjunction with SWOT analysis - standing for Strengths, Weaknesses, Opportunities and Threats.

Attractive Characteristics

An attractive industry, in terms of Porter's analysis, ought to exhibit the following characteristics ...

  • high barriers to entry of competitors because of factors such as high start up costs, government regulation, highly specialized technology, trade patents
  • low bargaining power of buyers of the product because of a large number of buyers
  • a low bargaining power of suppliers because of alternative substitutes, or a large range of suppliers
  • a low threat of substitute products because of a lack of similar products or services.
While these characteristics of a sector provide a competitive advantage or economic moat for a particular stock sector, other factors need to be taken into account such as the long-term prospects of a particular industry.

For example, cheap Asian labor is providing competitive threats across manufacturing industries in other parts of the world. An aging population could indicate strong growth in healthcare sectors of some countries.

To Conclude

Even in an attractive sector there will inevitably be winners and losers. So stock selection using a value investing approach within an attractive sector is the next step.

My overall aim of stock selection is to find the best stocks in the best performing sectors!

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