Porter’s Five Forces

Dr. Sajjad Haider

How does Competition manifest itself?

Dr. Sajjad Haider

Deptt of Business Management
How do the Five Forces of Competition in an industry
affect its profit potential?
Competitive Forces

 In order to sustain long-term profitability,

companies need to respond strategically to
competition.
 Few companies do it meaningfully that help it
garner useful information about the competitive
forces, others not.
 Michael Porter explained this in his revolutionary
1979 HBR article – a groundbreaking analysis in
competitive forces.
Michael Porter

 The essence of
strategy is not just
about choosing what
to do, but is also
about what not to do.
Typically, the state of competition in an industry depends on
five basic forces…
Michael Porter’s Five-Forces Model

1. Rivalry among competing firms

 Most powerful of the five forces
 Focus on gaining and maintaining

competitive advantage over other

firms
Conditions that Cause High Rivalry
Among Competing Firms

1. High number of competing firms

2. Similar size of firms competing
3. Similar capability of firms competing
4. Falling demand for the industry’s products
5. Falling product/service prices in the
industry
Conditions that Cause High Rivalry
Among Competing Firms…

6. Consumers can switch brands easily

7. Barriers to leaving the market are high
8. Barriers to entering the market are low
9. Fixed costs is relatively low
10. The products are perishable
Conditions that Cause High Rivalry
Among Competing Firms…

11. Rivals have excess capacity

12. Consumer demand is falling
13. Rivals have excess inventory
14. Rivals sell similar products/services
15. Mergers are common in the industry
The Five-Forces Model

2. Potential development of substitute

products
 Pressure increases when:

 Prices of substitutes decrease

 Consumers’ switching costs decrease
 e.g. Cellular companies in Pakistan offer lucrative
packages to switch the network, and offer free
SIM with free calling and data packages.
The Five-Forces Model

3. Bargaining Power of Suppliers

can increase when there are:
 Large numbers of suppliers
 Few substitutes
 Costs of switching raw materials is high
 Backward integration is gaining control or
ownership of suppliers
 e.g. PSL (Pakistan Services Limited) almost owns the
entire supply chain for it’s hospitality needs
What is Backward Integration?

 A process in which a company acquires or merges

with other businesses that supply raw materials
needed in the production of its finished product.
 Backward integration is aimed to save cost, reduce
warehousing and transportation costs, increase
revenues, gain control on and freedom in its supply
chain system, which may result in improved efficiency
in the production process.
 Backward integration may also create barriers to
entry of new industry entrants.
Backward Integration…

 However, Backward
Integration is capital
intensive and requires
large sums of money to
purchase part of the
supply chain.
 It also requires the
required expertise and
experience to run
diversified business
portfolios.
The Five-Forces Model

4. Bargaining power of consumers

 Customers being concentrated or

buying in volume affects intensity of

competition
 Consumer power is higher where
products are standard or
undifferentiated
Conditions Where Consumers Gain
Bargaining Power

1. If buyers can inexpensively switch

2. If buyers are particularly important
3. If sellers are struggling in the face of falling
consumer demand
4. If buyers are well informed about sellers’
products, prices, and costs
5. If buyers have discretion in whether and
when they purchase the product
The Five-Forces Model

5. Potential entry of new competitors

 Economies of Scale

 Capital/Investment requirements

 Customer switching costs

 Access to technology

 Brand loyalty

 Government regulations
Porter’s Model – additional competitive forces

 Savvy customers can force down prices by

playing you and your rivals against one
another.

 Powerful suppliers may constrain your profits

if they charge higher prices.
Porter’s Model – additional competitive forces…

 Aspiring new entrants equipped with new

capacity and hungry for market share, can
ratchet up the investment required for you to
stay in the game.

 Substitute offerings can lure customers away.

In wake of this situation – What can be some of the
strategies to counter competitive forces…

 Position your company where the forces are

weakest
 Find markets and places where the completion is
less stringent.
Porter’s Model – additional competitive forces…

 Reshape the forces in your favor

 e.g. To limit the threat of substitutes, offer better
value through wider product accessibility.
Porter’s Model – additional competitive forces…

 Reshape the forces in your favor

 Soft-drink producers did this by introducing vending
machines and convenience store channels, which
dramatically improved the availability of soft
drinks relative to other beverages.
The Shortcomings of the Five Forces Model

 The Five forces model is applicable to a specific

industry, not about a specific firm. Whereas the
SWOT analysis is intended to a specific firm.
 Firms often enter into partnerships with other
competing firms, and sometimes acquire or merge
with others, which this model does not explain.
 Limited application – applicable to for-profit
organizations only, and not applicable to non-
profit sector.
The Crux

 The intensity of competitive rivalry and

profitability is the major determinants of
the competitiveness of the industry.
 The more the number of competitors

(suppliers) in a given market, the lesser

the power of each supplier in such a
situation.
The End

Happy Reading