Q.

A. Michael Porter’s Five Forces Model

Porter’s Five Forces is one of the most traditional, well-known, and most widely used strategic macro analysis models. It
was created to help us evaluate the profitability of an industry. The Five Forces analysis can help companies assess
industry attractiveness, how trends will affect industry competition, which industries a company should compete in—
and how companies can position themselves for success (Porter, 2008). This is why the majority of businesses exist.
According to Chartered Global Management Accountant (2013), this is useful both in understanding the strength of an
organisation’s current competitive position, and the strength of a position that an organisation may look to move into.
The Five Forces are as follows:
● The threat of existing substitute products.
● The threat of new competitors entering which is closely related to the barriers to entry.
● The power that suppliers have over you.
● The power that customers have over you.
● These four previous forces combine to determine the competitive rivalry that exists within a sector.

1. New Entrants: This is the possibility and likelihood of companies entering an industry and boosting the competition,
which is typically determined as the barriers to entry. I f they are low, and it takes little effort, time, money (or reduced
legislation), then the threat of competitor’s flooding in is extremely high. Conversely, if barriers to entry are high
(expensive, strict legislation, lengthy qualification process, et cetera.), then it is going to put a lot of companies off and
decrease the competition. Some examples of industries with higher barriers to entry are telecommunications (network
infrastructure), pharma manufacturing (patents), and airline travel (fleet purchase and maintenance). Some examples of
industries with low barriers to entry are landscaping, home and office maintenance, and online advertising. Profitable
markets attract new entrants, which erodes profitability. Unless incumbents have strong and durable barriers to entry, for
example, patents, economies of scale, capital requirements or government policies, then profitability will decline to a
competitive rate (Chartered Global Management Accountant, 2013). The threat of new entrants into an industry can
force current players to keep prices down and spend more to retain customers. Actually, entry brings new capacity and
pressure on prices and costs. The threat of entry, therefore, puts a cap on the profit potential of an industry. This threat
depends on the size of a series of barriers to entry, including economies of scale, to the cost of building brand awareness,
to accessing distribution channels, to government restrictions. The threat of entry also depends on the capabilities of the
likely potential entrants. If there are well-established companies in the industry operating in other geographic regions,
the threat of entry rises (Porter, 2008). The typical determinants of threat as listed by Porter are:
>Brand loyalty (Do customers show a strong preference for existing companies’ products?).
>Legislation (Is there specific legislation that governs an industry?).
>Government policy (What are the ground rules for operating within a given territory?).
>New entrant response (how will existing players and customers react?).
>Capital requirement (how much capital is needed?).
>Access to suppliers and distribution channels (will it be difficult to gain access?).
>Cost advantages (Existing companies have more experience producing a product).

The threats of new entrants increases when there are no household brand names, the requirement of initial capital is low,
there is easy access to supplier channels and channels of distribution, weak government regulations, and when there is
unlikely risk of retaliation. On the other hand, the threat of new entrants decreases when there are several established
brand names, the requirement of capital investment is high, there is limited access to suppliers of distribution channels,
strong government regulations, and when the risk of retaliation is high.

2. Substitutes: A substitute is another product or service that meets the same underlying need that the industry’s product
meets in a unique way. The threat of a substitute is high if it offers an attractive price performance trade-off versus the
industry’s product, especially if the buyer’s cost of switching to the substitute is low (Porter, 2008). For example, email
is a substitute for written mail, Slack is a substitute for email, and Microsoft Teams and Google Chat are substitutes for
Slack. Many businesses tend to struggle with this section of the framework as they focus solely on direct competitors.
But if you think about it, substitutes appear in many different shapes, sizes, and offerings and may differ vastly from
your product. For example, Blockbuster famously failed to recognize the emergence of Netflix as a substitute product. It
was an online streaming service, with no physical stores nor DVD and VHS stock. Thus, if an industry (as a whole) fails
to acknowledge and/or adapt to substitutes through product performance, marketing, R&D, etc. it will suffer. In
accordance with Chartered Global Management Accountant (2013), Where close substitute products exist in a market, it
increases the likelihood of customers switching to alternatives in response to price increases. This reduces both the
power of suppliers and the attractiveness of the market.

3. Buyer Power: This refers to the buyer’s ability to drive and manipulate the industry. The more power they have, the
easier it is for them to carve out value for themselves by driving down prices, demanding better quality products
(consequently increasing supplier’s costs), and often playing industry competitors against one another. Of course, all this
comes at the expense of industry profitability. This scenario can emerge when buyers have leverage over industry
participants, especially if they are price-sensitive, using their advantageous position to force a reduction in prices.
Chartered Global Management Accountant (2013) suggests that buyer power is an assessment of how easy it is for
buyers to drive prices down. This is driven by the number of buyers in the market, importance of each individual buyer
to the organization, and cost to the buyer of switching from one supplier to another. If a business has just a few powerful
buyers, they are often able to dictate terms. Porter (2008) mentions that powerful customers can use their clout/influence
to force prices down or demand more service at existing prices thus capturing more value for themselves. Buyer power
is highest when buyers are large relative to the competitors serving them, products are undifferentiated and represent a
significant cost for the buyer, and there are few switching costs to shifting business from one competitor to another.
They can play rivals against each other – especially if an industry’s products are undifferentiated, it is inexpensive to
switch loyalties, and price trumps quality. There may be multiple buyer segments in a given industry with various levels
of power.

The typical determinants of buyer power threat are:

>Number of buyers (the more buyers, the lesser their bargaining power).
>Product standardization (if buyers believe they can find the same product elsewhere, price sensitivity comes into play).
>Switching costs (how much does it cost to change providers?).
>Buyer backward integration (when buyers can produce the industry’s product themselves if they deem vendors too
expensive).
>Purchase volume (High-volume buyers are particularly powerful in industries with high fixed costs).
>Customer influence (do distributors exert a strong influence over end customers? Therefore affecting their power over
suppliers).

The threats of buyer power are high when there are fewer buyers, low switching cost between vendors, when the threat
of buyer backward integration is high, the volume of purchase is high, downstream customer influence, and if the
product is a standardized industry product. On the other hand, the threats of buyer power are low when there are many
buyers, high switching cost between vendors, when there is little threat of buyer backward integration, the volume of
purchase is low, little to no downstream customer influence, and if the product is a non-standardized industry product.

4. Supplier Power: This poses a threat of increased prices for goods and services, reduced product quality, or a shift of
costs to other industry partners. A good example is the software industry. Take the likes of Microsoft, Apple, and
Salesforce. They practically monopolize their respective markets, leaving little leverage room for buyers. Chartered
Global Management Accountant (2013) proposes that supplier power is an assessment of how easy it is for suppliers to
drive up the prices. This is driven by the: number of suppliers of each essential input; uniqueness of their product or
service; relative size and strength of the supplier; and cost of switching from one supplier to another. Porter (2008) states
that companies in every industry purchase various inputs from suppliers, which account for differing proportions of cost.
Powerful suppliers can use their negotiating leverage to charge higher prices or demand more favorable terms from
industry competitors, which lowers industry profitability. If there are only one or two suppliers of an essential input
product, or if switching suppliers is expensive or time-consuming, a supplier group wields more power.

The typical determinants of supplier power threat are:

>A dependence on sector for income (if they are more dependant, they are less likely to take risks with buyers).
>Number of competitors.
>Switching costs.
>Buyer backward integration.
>Patented products (is the supplier the only one legally able to produce the product?).
>Product substitutes (are there available substitutes?).

The threats of supplier power are high when there is low dependance on sector for income, less competition than buyer,
the switching cost between buyers is high, threat of buyer backward integration, patented or differentiated products, and
when there is no product substitution. On the other hand, the threats of supplier power are low when there is high
dependance on sector for income, more competition than buyer, the switching cost between buyers is low, little threat of
buyer backward integration, non-patented or low differentiation between products, and when there are various substitute
products.

5. Competitive Rivalry: This is the most crucial factor as it is a familiar concept to many business owners and
entrepreneurs, manifested through heavy discounting, innovative product introductions, marketing campaigns, and
service improvements. when one business makes a significant market move it forces competitors to counter with their
own. This endless cycle of action and reaction is what limits profitability. It can particularly harmful (for businesses) if
the moving factor is the price. The typical determinants of threats of competitive rivalry are:
>Number of competitors.
>Industry growth.
>Exit barriers (anything stopping a company from leaving an industry, such as high exit costs or specialized assets).
>Fixed costs.
>Switching costs.
>Product differentiation.

The main driver is the number and capability of competitors in the market. Many competitors, offering undifferentiated
products and services, will reduce market attractiveness (Chartered Global Management Accountant, 2013). Porter
(2008) claims that if rivalry is intense, it drives down prices or dissipates profits by raising the cost of competing.
Companies compete away the value they create. Rivalry tends to be especially fierce if:
>Competitors are numerous or are roughly equal in size and market position.
>Industry growth is slow.
>There are high fixed costs, which creates incentives for price cutting.
>Exit barriers are high.
>Rivals are highly committed to the business.
>Firms have differing goals, diverse approaches to competing, or lack familiarity with one another.

The threats of competitive rivalry are high when there are a large number of competitors, slow industry growth, tough
exit barriers, high fixed costs, the switching costs between providers is high, and little product differentiation. On the
other hand, the threats of competitive rivalry are low when there are small number of competitors, fast industry growth,
low exit barriers, low fixed costs, the switching costs between providers is low, and product differentiation is a variety
on offer.

Real-life Example - Uber

New Entrants (MEDIUM)
>Barriers to entry: HIGH/MEDIUM
>Barriers to exit: LOW
>Economies of scale: LOW/MEDIUM
>Industry profitability: LOW (but improving)
>Incumbent powers: LOW [high for another US-based entrant but medium for some other countries (some
of the key markets already have a locally operating dominant company. Some of these could expand
internationally)]
Setting itself in the technological arena, Uber aims to provide a linking bridge between customers and transport
providers. This market requires a higher amount of initial capital to start up, and though Uber’s founders parted with a
substantial amount of capital, upcoming rivals are utilizing lesser initial capital to jump start their operations thereby
quickly penetrating the market.
Though Uber’s policy is to freely offer their software to willing clients, these services can however easily be swapped at
zero charges. As the demand to balance costs become imminent, Uber is not invulnerable to raising rates, making it
easier for other organizations to penetrate the industry. The ease of service swap by customers is a strong force because
it defines the firm’s survival rate in the sector.
Various problems have popped up in Uber operations; legal issues, negative press around several areas and even fines by
government authorities such as Germany, France, India, Thailand, Netherlands and United Kingdom has made the
market to be under controversies thereby making new entrants very cautious stepping into the business. This has at least
for a short period, reduced the threat of new entrants into the market who must work in overcoming all these challenges.
As a technology-based company, it is not easy for Uber to stop any form of imitation by any other transportation firm.
This means that it is easy for the concept to be copied by new ride-sharing companies and other competitors thereby to
not only operate in the same way as Uber but to also charge less for the same distance.
Substitutes (LOW – too different a value proposition)
>Car sharing: LOW/MEDIUM
>Self-driving cars: MEDIUM (but Uber is one of the leaders)
>Better public transport: LOW
>Bike sharing: LOW/MEDIUM
>Other (e.g. working from home): LOW
A Substitute is a well know fear that is experienced in a competitive business environment. In the transportation
industry, there are numerous member organizations that can quickly provide a replacement for Uber services. With the
service quality that Uber provides, taxi services, for instance, is the closest opponent and a potential substitute emerging
from the traditional transportation industry. Taxi service is traditional to towns with ride-sharing operations because of
both its lower-cost and efficiency, and user-friendly designing. As such, their abundance is enough to curb Uber from
elevating the service fees. It is noteworthy that due to price sensitivity, a minor rise of Uber rates can result in customer
taking on the services of its closest adversaries and alternatives. Moreover, due to the presence of other public means of
transport like trains, private cars and even self-driving cars (Google Cars) that offer similar services can threaten Uber’s
existence or operations. A constant threat of substitutes is currently a weak force in the case of Uber.

Buyer Power (HIGH)

> Bargaining power of riders: HIGH
>Switching barriers for riders: LOW
>Value proposition for riders: MEDIUM
>Rider information availability: HIGH
Uber’s clienteles are sensitive to price variations due to the existence of alternatives and rivals. As the market grows
bigger, the number of opponents bringing customers more choice also becomes larger thus makes the switching cost for
customers comparatively low. This is because Uber application software is not only free but just requires a client’
registration. Customers can therefore freely choose between Uber, Curb, Lyft, or other emerging ride-sharing entities at
no cost.
The number ownership of private cars has experienced a huge rise during the past few years, and though the parking
problems have been more severe than ever before, this has not stopped individuals from desiring the status attached to
one owning a car. This as an alternative means that the demand for Uber services is low.
In light of these factors, the buyers’ bargaining power has limited the amount of income for the firm, hence solidifying it
as an active force.

Supplier Power (LOW – but potentially rising)

 > Bargaining power of drivers: LOW (may increase with legislative changes)
>Switching costs of the drivers: LOW (but no alternatives not more compelling)
>Value proposition for drivers: MEDIUM
>Barriers of entry for drivers: LOW
One of the leading suppliers of the transportation industry is the availability of drivers. Uber does not own vehicle
among its fleets. As such, the company’s business model is mostly dependent on drivers owning cars. Regrettably, the
concentration of this group of suppliers to work for Uber is not very high due to the stringent requirements needed to be
hired by Uber. Uber utilize a subcontracting policy for its employment process to individuals that meet the terms of use
of their web application. It is also tough to substitute individual drivers as they are given the freedom to choose between
the organization and rivals. This results in drivers negotiating for better attention to the company’s expense. Therefore, it
is undeniable that the suppliers have a stronger power in impacting Uber’s performance.
Oil and gas suppliers is another major provider. The oil price has been plunged since 2015, and the lowest level has
reached less than $30 in the year 2017. Highly fluctuation of the price of such an essential component to company’s
transportation industry brings a high risk to the market because of the level of uncertainty and non-predictability of oil to
powers vehicles. Suppliers of these components thereby have a high bargaining power in the operations of Uber.

Competitive Rivalry (HIGH)

> Existing rivals (OLA, Lyft, Didi): HIGH (but consolidating)
>For Uber EATS: HIGH
>Direct rivals in non-US: MEDIUM (Lyft: 30%, Door Dash, GrubHub)
>Direct competition from niches: LOW (The “Uber of X” looks to be Uber)
>Locally focussed: MEDIUM/RISING
The trend of concentration of the industry appears to be higher than previous years, and the existing companies in the
market compete with both suppliers (car drivers) and customers. Though there are some competitors such as OLA, Curb
and Didi Chuxing, Lyft is considered the principal competitor of Uber. Lyft has an almost indistinguishable business
ideas and procedures to that of Uber. Not only are the two firms contending for market share but also the suppliers. A
modern business setting demands organizations target a customer base within a given geographical locations to cut on
the operation cost. This is the incident for Lyft and Uber. Uber has a deep-rooted business system and massive capital
investment. In essence, it is a market trailblazer, but small variation strategies limit the firm’s potential. Competition is a
weakening force given Uber’s supremacy. Uber is indeed a dominant force in the ride-sharing industry. However, there
is a need for improvement of its innovative strategies to gain a competitive edge. The transport sector especially the US
has many alternates and competing entities. To survive, it is vital for Uber to lower the cost of operation to avoid raising
customer charges.

References:
Chartered Global Management Accountant, 2013. Porter’s Five Forces of Competitive Position Analysis. Available at:
[Link] [Accessed February 6, 2022].

Hart, D., n.d. Porter’s Five Forces: Increase The Profitability of Your Business. ThePowerMBA. Available at:
[Link] [Accessed February 6, 2022].

Porter, M., 2008. The Five Forces. Institute For Strategy And Competitiveness. Available at:
[Link] [Accessed February 6, 2022].

[Link]

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The Porter’s Five Forces is a strategic macro analysis model, that assists in evaluating competitive position, and strength
of a position that an organisation may look to move into. The Five Forces are threats of substitute products, entry of new
competitors, suppliers power, buyers power and rivalry.

New Entrants: This is possibility and likelihood of companies entering an industry and boosting competition and what
are the barriers to entry. The facets like product differentiation, requirement of initial capital, access to supply channels,
availability of channels of distribution, government regulations are crucial to determine barriers to entry. Hence, lower
the costs or weaker the barrier, higher the possibility of new entrants.

Substitutes: A substitute is another product or service that meets consumer’s needs. Ease of availability, price, quality of
substitute or buyer’s cost of switching products are key factors of substitutes threat posing abilities. (Porter, 2008). If the
firm fails to acknowledge substitutes through product performance, marketing, R&D, etc. it will suffer. In accordance
with Chartered Global Management Accountant (2013), where close substitute products exist, it increases likelihood of
customers switching to alternatives in response to price increases. This reduces power of suppliers and attractiveness of
market. For example when sugar prices rise, sales for jaggery increase.

Buyer Power: This refers to buyer’s ability to drive and manipulate the industry. The more power they have, the easier it
is to carve out value for themselves by driving down prices, demanding better quality products, increasing supplier’s
costs, and often playing industry competitors against one another which impacts profitability. Chartered Global
Management Accountant (2013) suggests that buyer power is driven by number of buyers, importance of each individual
buyer to organization, and cost to buyer of switching from one supplier to another. Porter (2008) mentions that buyer
power is highest when buyers are large relative to competitors serving them, capability to backward integrate is low,
products are undifferentiated and represent a significant cost for buyer, and there are few switching costs to shifting
business from one competitor to another. For example, influence of Reliance Industries (Ambani Group) over its
suppliers.

Supplier Power: Every firm purchases various goods from suppliers. Powerful suppliers use their negotiating leverage to
charge higher prices or demand more favorable terms, which lowers industry profitability especially if there are few
suppliers only, or if switching suppliers is expensive or time-consuming, or where capability of backward integration is
lower, a supplier group wields more power. This poses a threat of increased prices, reduced product quality, or shift of
costs to other industry partners. A good example is software industry where likes of Microsoft, Apple practically
monopolize respective markets.

Competitive Rivalry: This is the most crucial factor manifested through heavy discounting, innovative product
introductions, marketing campaigns, and service improvements. When one business makes a significant market move, it
forces competitors to counter act creating cycle of action and reaction and thereby checking profitability. The main
drivers are number and capability of competitors, size and market position. Threats of rivalry are high when there are a
large number of competitors, slow industry growth, tough exit barriers or specialized assets, high fixed costs, switching
costs between providers is high, and little product differentiation. For example rivalry of coke and pepsi has been seen as
the greatest rivalry.