Most people think of business competition as a tug of war between rivals, with each

competing for more sales or market shares. But, according to Harvard Business School
professor Michael Porter, competition is more complex than that. It’s not about who’s
the biggest, it’s about who is the most profitable. And profitability is defined by five
competitive forces.
Porter's Five Forces is a simple but powerful tool that you can use to identify the main
sources of competition in your industry or sector.
When you understand the forces affecting your industry, you'll be able to adjust your
strategy, boost your profitability, and stay ahead of the competition. For example, you
could take fair advantage of a strong position or improve a weak one, and avoid taking
wrong steps in the future.
Today, we will explore each of Porter's Five Forces and show you how to use them to
analyze your organization's strengths and weaknesses, and how to identify critical
factors that may affect your profitability.

Add ko lang ‘tong part na ito hane hehe

The Five Forces framework was developed by Harvard Business School professor
Michael E. Porter.
Since the model was first published in 1979 in the Harvard Business Review, it has
been named one of the ten most influential papers ever published by that publication.
The model works by analyzing factors at the meso level. Meso-level forces are those
external forces in direct contact with a company. The meso level sits between the macro
and micro levels of analysis. The macro-level has a one-way effect on a firm, and the
firm has no control over it, for example, if the government changes the tax rate there is
nothing the firm can do about it. The micro-level is internal to the organization and
entirely under its control, so if a firm wants to change the color of its website it can go
straight ahead and make it happen. The meso level sits between these two levels, and
whilst firms can influence these factors they don’t have complete control over them.
Most companies already watch their closest competitors’ moves, but carrying out a
broader meso analysis such as Porter’s Five Forces allows you to observe and shape
other factors that impact your profitability.
Porter developed the Five Forces model in response to SWOT analysis, which he found
too subjective and lacking rigor.
Let me present to you this graph, the model essentially says that the higher the
competitive forces, the lower the profit potential and the less attractive the industry.
Conversely, the lower the competitive forces, the higher the profit potential and the
more attractive the industry.

It is important to understand that analyzing an industry using the Five Forces framework
gives you a snapshot in time of the industry. Over time, the forces that affect an industry
are dynamic and will change in nature. For example, a market might be hard to enter
today because of high entry barriers, but this might not be the case ten or twenty years
from now.

Let’s examine each of the five forces in turn.

1. Existing Competitor Rivalry

In the middle of the diagram is competition between existing firms, including yours, if
you’re already in the market.

The intensity of competition is driven by the number of competitors within the industry
and how similar their products are.

If rivalry is intense, this will drive down profits across the industry—fierce rivalry results
in firms offering deep discounts and spending large sums on marketing to acquire
customers.

When rivalry is intense, it’s often easy for customers to substitute your firm for another.
For example, a flight from London to Paris is a flight from London to Paris; does it really
matter which airline you fly with?

When you have few rivals, and you’re positioned uniquely, then it’s hard to substitute
another product for yours, and consequently, you can charge more, improving your
profit margin. This is the reason that Apple can charge more for their laptops than Dell
can charge for theirs.

Competition between existing firms is at the center of the diagram to indicate that all the
firms jockeying for position within an industry are surrounded by four other powerful
forces.

2. Threat of New Entrants

The threat of new entrants to the market puts a limit on how profitable that market can
be. This is because the threat alone will force you and your competitors to keep prices
low to discourage new entrants.

How easy or difficult it is for a new firm to enter the market will depend on the industry’s
barriers to entry. Firms create high barriers to entry by possessing unique intellectual
property or technology, benefiting from economies of scale, having high brand loyalty,
using vertical integration, and government restrictions.

Let’s look at how a fashion firm such as Louis Vuitton might create a barrier to entry.
One way they try to do this is through vertical integration. Vertical integration is where a
firm owns its suppliers and its distribution channels. In Louis Vuitton’s case, this means
owning all its own retail stores. If a new entrant wants to enter the market, having to
setup up its own stores to compete is a huge barrier to entry.

VERTICAL INTEGRATION – Vertical integration is a strategy that allows a company to

streamline its operations by taking direct ownership of various stages of its production
process rather than relying on external contractors or suppliers.
Vertical integration occurs when the chocolate manufacturer (e.g. Mondelez) purchases
a cocoa bean processor that is buying its beans from. As a result, the manufacturer can
pay exactly the marginal cost – rather than profiting the processor. In turn, consumers
may see lower prices in a competitive market place.

If it is easy for new firms to enter your market and compete, then profits will be lower
across the industry. If one or more barriers to entry exist, then profits across the industry
will be higher.
3. Buyer Power
How much power do buyers within the industry have? If your customers are powerful
enough to force you to reduce your prices, profits will be lower across the industry.

Buyer power will be highest when there are few buyers, products are undifferentiated
from each other, and the cost of switching from one supplier to another is low.

When buyers have power, they can play rival firms against one another, driving prices
down across the industry.

4. Threat of Substitution
How easy would it be to swap your product for an alternative product? This threat isn’t
about replacing your product with an identical product but about your customers finding
another way to achieve what your product does.

For example, customers might choose to replace your airline’s flights with
videoconferencing software. The rise of working from home may limit the rents that
commercial office owners can charge.

The existence of substitute products will place a limit on the ceiling price you can
charge. Again, this has the overall effect of limiting profitability across the industry.
substitute goods can replace each other because they serve the same functions

5. Supplier Power
Your suppliers’ power is determined by how easy it is for your suppliers to raise their
prices.

The fewer suppliers there are, and the more unique their product or service, the more
power suppliers have. It’s easy for a supplier to raise their prices when their product is
unique, and you can’t switch to another supplier.
If your suppliers have high power, they will be able to raise their prices, and this will
squeeze your profits because you’ll have no option but to absorb this increased cost.
When this happens, your supplier captures profit from your industry, and profits across
your industry are reduced.

To sum it up, Michael Porter's Five Forces model is an important tool for understanding
the main competitive forces at work in an industry. This can help you to assess the
attractiveness of an industry, and pinpoint areas where you can adjust your strategy to
improve profitability.