Porter’s Five Forces

Porter’s Five Forces analysis is a framework that helps analyzing the level of competition within a
certain industry. It is especially useful when starting a new business or when entering a new industry
sector. According to this framework, an industry depends on five basic forces: threat of new
entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products
or services, and existing industry rivalry. The collective strength of these forces determines the
profit potential of an industry and thus its attractiveness.

Full list of Porter’s Five Forces factors:

Threat of new entrants

• Economies of scale
• Product differentiation
• Brand identity/loyalty
• Access to distribution channels
• Capital requirements
• Access to latest technology
• Access to necessary inputs
• Absolute cost advantages
• Experience and learning effects
• Government policies
• Switching costs
• Expected retaliation from existing players

Bargaining power of suppliers

• Number of suppliers
• Size of suppliers
• Supplier concentration
• Availability of substitutes for the supplier’s products
• Uniqueness of supplier’s products or services (differentiation)
• Switching cost for supplier’s products
• Supplier’s threat of forward integration
• Industry threat of backward integration
• Supplier’s contribution to quality or service of the industry products
• Importance of volume to supplier
• Total industry cost contributed by suppliers
• Importance of the industry to supplier’s profit

Bargaining power of buyers

• Buyer volume (number of customers)

• Size of each buyer’s order
• Buyer concentration
• Buyer’s ability to substitute
• Buyer’s switching costs
• Buyer’s information availability
• Buyer’s threat of backward integration
• Industry threat of forward integration
• Price sensitivity
Threat of substitute products or services

• Number of substitute products available

• Buyer’s propensity to substitute
• Relative price performance of substitutes
• Perceived level of product differentiation
• Switching costs
• Substitute producer’s profitability & aggressiveness

Rivalry among existing competitors

• Number of competitors
• Diversity of competitors
• Industry concentration and balance
• Industry growth
• Industry life cycle
• Quality differences
• Product differentiation
• Brand identity/loyalty
• Switching costs
• Intermittent overcapacity
• Informational complexity
• Barriers to exit

The 5 forces in market competition- Michael Porter’s 5 Forces Model

5 Forces of market competition are –
1. Intensity of rivalry among existing competitors
2. Bargaining power of buyers
3. Bargaining power of buyers
4. Threat of substitutes
5. The threat of new entrants
Competitors
The intensity of rivalry among existing competitors:

• If the competition is high, then companies struggle away the value they create, passing it
to buyers in lower prices or dissipating it in higher costs of competing.
Customers
The bargaining power of buyers, the customers of the market :

• Powerful buyers will push prices down or will demand more value in the product.
• Surely, buyers are more likely to use their negotiating leverage if they are price sensitive.
This is the case when what they are buying:
- Is not differentiated.
- Is expensive relative to their other costs or income.
- Has low impact on their performance.
Suppliers
The bargaining power of suppliers :

• Powerful suppliers will charge higher prices or insist on more favorable terms, lowering
market profitability.
Substitutes
The threat of substitutes :

• Products or services that meet the same basic need as the market’s product in a different
way, put a cap on the market profitability.
New entrants
The threat of new entrants :

• Entry barriers protect a market from newcomers who would add new capacity and capture
market share. The threat of entry decreases profitability :
- It caps prices, because higher market prices would make entry more attractive for
newcomers.
- Therefore, incumbents have to spend more to satisfy their customers to discourage
new entrants.

Michael Porter’s Value Chain Mode

Porter explains that a value chain is a collection of processes that a company performs to create
value for its consumers. Value chain model is a strategic management tool use to analyses a
company’s value chain-defined as the combination of processes that the company uses to make
money.
Primary activities are- Porter breaks down his value chain model into five primary processes, or
activities.
1. Inbound Logistics- This includes the warehousing and associated inventory control of raw
materials. This also includes the nature of the relationship with suppliers.
2. Operations- Operations encompass any process that turns raw materials into a finished
product ready for sale, including labeling, branding, and packaging.
3. Outbound Logistics- Outbound logistics concern any process where the product is
distributed to a customer. This includes the storage and distribution of products and the
processes involved in fulfilling customer orders.
4. Marketing and Sales- Any processes that attempt to enhance product visibility among a
target audience are included in marketing and sales. This activity is also heavily reliant on
customer relationships.
5. Service- Services include any processes that occur after a purchase has been made,
including customer service, repairs, refunds, and warranty acknowledgement.
Support activities are- Within Porter’s Value Chain Model there are also four secondary activities
which support the foundational primary activities common to most businesses.

1. Firm’s Infrastructure- Firm’s infrastructure entails any process that supports daily business
operations. Administration, clerical, financial, and line management are all value-creating
infrastructure processes.
2. Human Resource Management- Human resource management (HRM) covers any process
related to the training, acquisition, or termination of employees. HRM departments and
their ability to hire talented and motivated staff are crucial to a company’s competitive
advantage.
3. Technology Development- Technology can create a competitive advantage in Porter’s
value chain because it can streamline important processes. These include payroll
automation software, customer service procedures, and distribution networks.
4. Procurement- Procurement is simply the acquisition of necessary goods or services. The
most typical example is the procurement of raw materials and the negotiation of pricing
and product purchase contracts. It may also include the purchase of equipment, offices,
buildings, and machinery.