LEVEL: Introductory

LENGTH: 45 minutes

Industry Analysis
Lesson Overview
In this lesson, students are going to learn the Porter’s Five Forces framework and use it to
analyze industry structure, teaching them how to think critically about investment choices.
The lesson will not only help students identify the five forces, but also the components of each.
Students will practice analyzing the PPE (Personal Protective Equipment) industry using a
student worksheet.

Background Knowledge for Teachers

INSIDE THE COMPETITION
How would you choose the best industry in which to invest your
Use the Porter’s Five Forces
money? Economist Michael Porter has already answered that
framework to analyze an
question. In 1980, he wrote the book Competitive Strategy, in
industry that is reflected in
which he came up with five economic forces to explain why certain
the Approved Stock List and
industries consistently outperform others. Porter’s Five Forces decide whether to invest in
is a useful tool to assess and comprehend the key drivers and that industry and how much to
inhibitors of an industry’s profitability, and whether that industry invest.
is worth your investment.

MATERIALS
Learning Objectives Provided
1. Student worksheet 1
At the end of this lesson, students will be able to: (page 5)
■ Define the five tenets of Porter’s Five Forces 2. Student worksheet 2
(page 6)
■ Apply the framework to different industries in order to evaluate Not Provided
their investment potential Student computer with internet
access, projector, screen, white
board, sharpies
Glossary Terms
Watch how Wharton faculty define and use the glossary terms
STUDENT VOICES
presented in this lesson:
In the storytelling round of our
■ Brand 2020 Comment & Win contest,
Pennsylvania high school
■ Competition student Zach U. won praise
■ Competitive Strategy for his brief narrative about
Personal Protective Equipment.
■ Industry Encourage your students to
■ Sunk Cost check out his comment for an
interesting PPE perspective.
■ Supplier

©2022 The Wharton School, The University of Pennsylvania

 Industry
Analysis 2
Lesson Plan
SEQUENCE/TIME DETAILS

Begin the lesson with five quick definitions of each force, using the cell phone service
industry as an example. The U.S. has four primary cell phone service providers: Verizon,
Sprint, T-Mobile and AT&T.
Definitions
/10 mins THREAT OF NEW COMPETITION/ENTRANTS
This refers to the threat of other firms (competitors) entering your market. The threat of
new cell phone competitors is fairly low. There are significant investment costs to start
a cell phone service company (e.g., purchase spectrum infrastructure, develop a sales
network, etc.). The costs associated with these investments as well as having to develop
brand recognition may keep some companies from entering the industry.

THREAT OF SUBSTITUTES
This can be a tricky tenet to understand. It does not refer to competitors within the same
product line, but rather to complete substitutions that might appeal to consumers. For
example, within the taxi transportation business, customers might abandon the taxi
entirely and substitute that paid service for a train ride instead. The threat of substi-
tutes for cell service is moderate. Customers might instead choose Zoom, a landline or
Facetime to hold their calls. However, they may not be great substitutes for a cell phone
because they are not as convenient. Still, customers may switch to these substitutes
because they are cheaper.

BARGAINING POWER OF CUSTOMERS

This refers to the power of customers to influence the pricing of products. The bargain-
ing power of consumers for cell service is low. Consumers have practically no ability to
bargain with cell phone service providers. There are a lot of consumers and very few
cell phone providers. It is true that a single consumer can leave Verizon and take his/
her business to AT&T, but this will not affect Verizon on a large scale. Cell phone service
providers for the most part offer pricing plans that are similar (i.e. within a range of $10-
15). They try to differentiate through various perks outside of pricing, such as unique
phones. For example, AT&T at one point had an exclusive deal with Apple for its iPhone.

BARGAINING POWER OF SUPPLIERS

This refers to the power of suppliers who provide the materials that are needed to make
a product or for a product to function. The bargaining power of suppliers (cell phone
manufacturers) is relatively low. There are very few cell phone service providers who will
purchase cell phones and a lot of cell phone manufacturers. The only time where this
power dynamic might shift is when a cell phone manufacturer has a unique product. This
was the case with Apple when it first came out with the iPhone.

INTENSITY OF COMPETITIVE RIVALRY

This refers to the pricing competitiveness between firms in the industry. As noted above,
the competitive rivalry is low-to-modest in the cell phone service industry. The cost of a
cell phone plan has not varied much. If one of the four companies dropped its contract

CONTINUED >
©2022 The Wharton School, The University of Pennsylvania
 Industry
Analysis 3
price, then the other companies would follow suit. As a result, all four companies would
Definitions lose out because their profits would be significantly reduced. Therefore, cell phone com-
/10 mins panies try to avoid competing on price. For example, how many cell phone commercials
from the big four companies do you see where they advertise monthly contract prices?
Typically, they will compete on service area covered or other features (i.e. unlimited data).

After providing very cursory definitions of Porter’s Five Forces, split the class into five
groups. Assign each group to one of the five forces. Each group will have 10 minutes to
Activity do the following:
/15 mins 1. Use Student Worksheet 1. Match each force with things/situations that might influ-
ence them on the left. Each group needs to match all five forces. [The answer key is in
a separate document here]
2. Focusing on their assigned force, each group will name one industry where their
force is high and one industry where their force is low.
For example:
Threat of new competition is influenced by barriers to entry (i.e. things that prevent
others from starting a new business or entering a new market). These barriers include
sunk costs, strong existing brands, and industry profitability. Low sunk costs, few exist-
ing brands, and high profitability will all increase threats to new competition.
High: Bakery
Low: Airline industry
Threat of substitutes is driven mostly by consumer preference, switching costs, and
the number of products on the market. If consumers are indifferent to substitutes, face
low switching costs, and there are very few existing products, then there will be a high
threat of substitute products. However, it is not always obvious what a substitute prod-
uct might be.
[Quick question: how could a drill and a fancy steak meal be substitutes?]
[One possible answer: Both products chase Father’s Day gift money.]
High: Fast food
Low: Cell phone service
Bargaining power of customers is influenced by how dependent a company is on its
customers. If customers buy in large volumes, and customers can easily switch from one
product to another, then customers will have a lot of bargaining power.
High: Grocery stores
Low: Pharmaceuticals
Bargaining power of suppliers is influenced by how dependent a company is on its
suppliers. If a company has few potential suppliers and relies on very specific inputs,
then the bargaining power of suppliers will be very high.
High: Diamonds
Low: Beverages
Intensity of competitive rivalry depends on how many companies are in the market,
the bargaining power of customers, how differentiated products are, and pricing power.
If an industry has low customer bargaining power and companies can differentiate their
products based on features and not price, then the competitive rivalry is usually minimal.
High: Personal computers
Low: Pharmaceuticals
©2022 The Wharton School, The University of Pennsylvania
 Industry
Analysis 4
Break students into groups of five and use the student worksheet to conduct a five forces
analysis of the PPE (Personal Protective Equipment) industry. Use Student Worksheet 2.
For a quick overview of PPE, check out our business journal article.
Practice They must be prepared to answer:
/15 mins
1. After your five forces analysis, do you judge the PPE industry favorably or unfavor-
ably? Would you invest your client’s money in the PPE industry?
2. If you have to invest in this industry, where would you put your money and how
much would you invest?
Select two groups to present their findings.

Porter’s Five Forces is a useful tool to assess and comprehend the key drivers and inhibi-
tors of an industry’s profitability, and whether that industry is worth your investment.
Takeaways Industry forces can change; strategists must remain attentive.
/5 mins
The firm’s internal competencies and resources also matter a lot: there are strong (and
strongly profitable) firms in weak industries. Therefore, using both SWOT and Porter’s
Five Forces will give you a better idea.

Extend
Read this KWHS article “Show Me the Money: Analyzing Porter’s Five Forces” and think more about
analyzing an industry. Also, think about the limitations of the Porter’s Five Forces framework.

©2022 The Wharton School, The University of Pennsylvania

 Industry
Analysis 5
Student Worksheet 1
There are strong existing brands in the industry. For example, Nike,
Adidas in the sports footwear industry. THREAT OF
NEW ENTRANTS
There are so many houses on the market to be sold but there are not
many people who want to buy houses. Consumer demand is weak.

Products are perishable so companies want to sell them quickly and

also make decent profit, hopefully beat their competitors.

The price for switching to another product/ service is low. For

BARGAINING POWER
example, you can grab a burger or a sandwich or slices of pizza for
OF BUYERS
lunch. The price does not usually differ much.

Products do not have significant difference. For example, personal

computer industry

The industry is highly profitable and the barriers to enter is low. For
example, the graphic design industry. Everyone can be a graphic
BARGAINING POWER
designer but a good one costs a lot.
OF SUPPLIERS

Unequal access to distribution channels. For example, you don’t see

many new soft drinks stocked up in a 7-11 cooler. Most likely you see
big brands more often, such as Coca Cola or Pepsi.

The Coca-Cola brand is hard to replace. When they distribute

their products in various retail stores, they might have a stronger
THREAT OF SUBSTITUTE
influence over price.
PRODUCTS OR SERVICES
Pilots went on strike to protest unequal pay. They refuse to supply
their labor until satisfied.

Wouldn’t it be great to get your products on WalMart shelves?

Maybe . . . WalMart is very demanding buyer. They have a 1 + policy
– suppliers need to either beat last year’s price or add new features.
There are so many people who want to sell at Walmart so Walmart RIVALRY AMONG

can switch to different vendors easily. EXISTING COMPETITORS

Consumer preference. For example, some people prefer to take a bus

rather than driving from New York to Philadelphia.

©2022 The Wharton School, The University of Pennsylvania

 Industry
Analysis 6
Student Worksheet 2

©2022 The Wharton School, The University of Pennsylvania

 Industry
Analysis 7

©2022 The Wharton School, The University of Pennsylvania

 Industry
Analysis 8

©2022 The Wharton School, The University of Pennsylvania

 Industry
Analysis 9

AFTER YOUR FIVE FORCES ANALYSIS, DO YOU JUDGE THE INDUSTRY FAVORABLE OR UNFAVORABLE? WOULD YOU INVEST YOUR
OWN MONEY IN THE PPE INDUSTRY?

IF GIVEN $100K TO INVEST IN THIS INDUSTRY ONLY, WHERE WOULD WE PUT IT?

©2022 The Wharton School, The University of Pennsylvania