PCU-MBA E (Modular) | Philippine Christian University

THE OPERATING ENVIRONMENT’S OPPORTUNITIES AND THREATS

COMPETITIVE FORCES; PORTER’S FIVE-FORCES MODEL
Narrative Report
The five forces identified by Porter that influence corporate strategy are Rivalry among competing firms,
Potential of entry of new competitors, Bargaining of power of suppliers, Bargaining power of customers,
and Potential development of substitute products. Its ultimate purpose is to explain how profits may be
sustained in the face of negotiation and direct and indirect competition.

Evaluating the five forces can assist businesses in anticipating competition adjustments, influencing the
evolution of industry structure, and identifying more advantageous strategic positions. A diagnostic
approach based on five competing pressures degrades an industry’s average long-term profitability. It is
one of the most important and widely accepted models in premier b-schools.

#1 – RIVALRY AMONG COMPETING FIRMS

More rivals and similar products and services reduce a company’s strength. First, examining niche’s
competition is vital. It reveals market competitiveness, rivals, and competitive strategy comprehension.
Many variables affect industrial rivalry. Industry expansion, Fixed costs value-added, intermittent
overcapacity, product disparities, brand identity, switching costs, Informational complexity, competition
diversity, corporate stakes, and departure hurdles. Promotional and pricing battles may affect a
business’s bottom line when rivalry is intense.

#2 – POTENTIAL OF ENTRY OF NEW COMPETITORS

This group explores how rivals can enter the market. When new competitors may enter easily,
incumbent businesses risk losing market share. Strong entry barriers allow incumbent enterprises to
demand higher prices and better conditions. Comparative cost benefits, resource access, size, and brand
identification are entry barriers.

#3 – BARGAINING OF POWER OF SUPPLIERS

Businesses rely on each other online and offline. This aspect considers a supplier’s influence on a
company. When evaluating the prospect of supplier overreliance, the elements to consider include
market supply, bargaining power, and switching suppliers involves money, from rewiring hardware to
developing new supply networks.

#4 – BARGAINING POWER OF CUSTOMERS

One of the Five Forces is customers’ capacity to push down prices. It depends on how many clients a firm
has, how important each one is, and the amount it would take to find new ones. If there are fewer
customers than suppliers, they have “buyer power.” This implies they may easily move to cheaper
competitors, lowering costs. In food retail, buyer power is important. Imagine crowded, competing
supermarkets.

#5 – POTENTIAL DEVELOPMENT OF SUBSTITUTE PRODUCTS

This force analyses how simple it is for consumers to switch products or services. It assesses the number
of rivals, their pricing and quality compared to the firm being analyzed, and how much profit they
generate to determine if they can cut their expenses. Cost of switching, both immediate and long-term,
and customers’ willingness to shift influence the danger of replacements. The final force is other
substitute products. Companies with no comparable substitutes can raise prices and lock in
advantageous conditions. When close replacements are available, buyers might skip a company’s goods,
reducing its power.

Example
Let us look at Porter’s five forces example of the airline industry given by Porter himself:

#1 – RIVALRY AMONG COMPETING FIRMS

In a competitive examination of the U.S. airline sector, low-cost airlines and strict regulation lead to high
operational expenses. Instead of letting airlines pick markets to operate and categories to target,
authorities entertain travelers. Hence, low-cost carriers have stopped full-service airlines, and the
industry has become one of the most competitive in the U.S.
#2 – POTENTIAL OF ENTRY OF NEW COMPETITORS

Entry is rising despite slowing market growth as many industry newcomers fail. Moreover, existing
airlines often enter new markets. As a result, the threat of entrance has little effect. New entrants face
entry hurdles, whereas incumbent operators face little.

#3 – BARGAINING OF POWER OF SUPPLIERS

Since the environment impacts airlines’ inputs, providers have a lot of power. Firstly, the price of fuel oil
is determined by geopolitical and other events in the global oil market. Secondly, airlines must buy or
lease aircraft; therefore, they rely on suppliers.

#4 – BARGAINING POWER OF CUSTOMERS

Airlines have always been competitive. However, online ticket booking and transmission platforms give
customers instant access to timetables and fares, empowering them to make budget selections. As a
result, customers have more negotiation power.

#5 – POTENTIAL DEVELOPMENT OF SUBSTITUTE PRODUCTS

In the U.S., consumers rarely travel by train or bus; therefore, the aviation industry is not challenged by
alternatives and complementing assets. In addition, as customers prefer air travel; thus, rail and bus
alternatives are limited.

PORTER’S FIVE FORCES EXPLAINED

The Porter’s five forces definition suggests a paradigm for analyzing the competitive forces at play in an
industry, which determines the distribution of economic value among industry participants. The purpose
of Porter’s Five Forces model is to evaluate the competitive environment of a certain industry. Porter’s
five forces importance is immense as all of these forces represent a crucial aspect of designing a business
strategy in light of the market.

With the help of Porter’s Five Forces evaluation, a business owner can gauge the market’s
competitiveness.

If these influences are extremely potent, they contribute to the overall unattractiveness of the industry.
This is because the intensity of each negatively impacts the chance of total profitability. Therefore, a
desirable industry is one where “pure competition” occurs, and all participants can earn fair profitability.

Evaluating the five forces can assist businesses in anticipating competition adjustments, influencing the
evolution of industry structure, and identifying more advantageous strategic positions. A diagnostic
approach based on five competing pressures degrades an industry’s average long-term profitability. It is
one of the most important and widely accepted models in premier b-schools.