What is Porter's five competitive forces?

Today, competition in all industries has intensified and every company needs a proper
analysis of the market and competitors to enter and succeed in the market. There are various
tools to analyze the market situation and competition, and one of the suitable methods for
evaluating market competition is the use of Porter's theory of five forces. In the following,
we will explain this theory.

Porter's Five Competitive Forces at a Glance (1)

Threat of New Entrants

Competition Between Current Competitors

Threats of New Competitors

Introduction

Michael Porter (1976) believes that to determine the amount of profit, we must take a closer
look at the state of competition. If we want to design a strategy and a plan to enter or operate
in an industry, we must have a proper knowledge of the competitive situation in that
industry. Using the competition survey, we can identify the most appropriate location to
enter and identify the best industry to enter or not to enter. Porter's analysis consists of 5
parts:
 Porter's Five Competitive Forces (1)

Alternative Goods

The alternative product is a product that is very similar to the product you offer in terms of
quality and basic features, and if the customer finds superiority in one of them, he can
choose one of these two products instead of the other. For example, soft drinks and beer
can be chosen instead. Having an alternative product can reduce demand as well as reduce
prices, thereby reducing the profitability of an industry.
The strength of alternative goods can be measured in terms of cost (superiority in price and
total cost of ownership) as well as in terms of performance (superiority in features and
quality).

Bargaining Power of Suppliers

It is more attractive for suppliers to enter this field if the suppliers of the product have a
high ability in the field of bargaining. It is possible to check the bargaining power of
suppliers with the following factors:
Number of suppliers: If the number of suppliers is high, the customer can be more open-
handed in the selection, and as a result, the power of a supplier is reduced.
Degree of differentiation between products
High fixed cost: If the fixed cost (regardless of the number of production) is high for a
supplier, they must produce high and as a result loses their bargaining power.

The Bargaining Power of Buyers

If the bargaining power of buyers in an industry is not high, this industry is more attractive
for a new supplier to enter because the supplier has the upper hand in relation to the
customer.
Number of buyers: It is natural that a high number of buyers reduces their power because
if one buyer does not buy the product, other customers will be found for this product.
Replacement costs: If the cost of exchanging a product is high for the buyer, the customer
cannot easily change his supplier and as a result gains less bargaining power.
Product vitality: If the product is important to the customer (its existence is necessary,
and its absence will cause a lot of damage to the customer) the bargaining power of the
customer is reduced.
Familiarity with the product and its production method: If the customer has complete
information about the product, he will gain a lot of bargaining power about the price and
side features of the product.

Threats of New Competitors

When the market is open for new companies to enter, the number of competitors and their
tools is increasing every day, and as a result, the cost of competition increases, and the
profit of each company decreases. If a market is exposed to many new competitors, you
cannot stand in it for a long time. But if, on the contrary, a market is difficult for
competitors to enter, it can be monopolized with good quality. The following factors affect
the ease or difficulty of entering new competitors:
High initial Investment: For example, the initial investment is required for industries such
as petrochemicals and steel is high and not every competitor can enter the market, so the
threat of new competitors is less, but in industries such as news websites entry does not
require high costs.
Supply channel: If access to sales ways and product supply is easy for the manufacturer
(food products), the work is easier to enter, but products such as pharmaceutical goods is
difficult to enter.
Technology complexity: If the sophisticated technology is required for a product, it will
be more difficult for newcomers to enter.
Differences in products: Many differences in the characteristics of a product make it
difficult for a newcomer to enter, for example, entering the field of mobile is not an easy
task, but there is no difficult task to enter the mineral water industry.

Experienced learning time: If it takes a long time to enter an industry (pharmaceutical

industry) and learning requires a lot of time and money, it can be said that newcomers will
not enter this industry because too much time and cost will prevent them.
Government: Government laws regarding the establishment of a company in this field,
the ease of obtaining concessions, loans, or facilities for new actors in a field, or the
exclusive rules for a product affect the entry status of new companies.

Competition Between Current Competitors

This force is generally the strongest force in the Porter model and should be given more
attention. In case of high intensity of competition between competitors, it can be said that
entering this offer is not very attractive. The intensity of competition between competitors
is affected by these factors:
Fixed costs: High fixed costs increase competition.
Conversion cost: The cost of conversion and redirection from one product to another can
make competition difficult.
Similarity of competitors: The more similar competitors are in terms of facilities and
capital (financial assets, manpower, etc.), we can say that there is more intense competition.
Barriers to exit: If leaving an industry is not easy (high conversion costs, high fixed
capital, low scrap prices, government restrictions, etc.) there will be more intense
competition.

Reference

1) On Competition, Michael E. Porter, Harvard Business Review Press; Upd Exp

Edition (September 9, 2008)