FIVE FORCE ANALYSIS
By Michael E. Porter
FIVE FORCE
ANALYSIS
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INTRODUCTION
five force analysis is a tool that analyzes the competitive environment of a business based on
five factors:
▪ threat of new entrants
▪ threat of substitutes
▪ bargaining power of customers
▪ bargaining power of supplier
▪ Competitive rivalry
It was developed by Michael E. Porter in 1979 and has since become a widely used framework
For strategic analysic
THREAT OF NEW ENTRANTS
▪ This refers to the ease or difficulty of new competitors entering the industry or market.
▪ The threat of new entrants is high when there are low barriers to entry, such as low capital
requirements, low switching costs, low regulatory restrictions, or high customer demand.
▪ The threat of new entrants is low when there are high barriers to entry, such as high capital
requirements, high switching costs, high regulatory restrictions, or low customer demand.
for example:-
In the airline industry, the existing firm economics of scale has economies of scale in terms of
purchasing fuels, aircraft, landing slot and maintenance services, which make it hard for new
entrants to complete them to price
THREAT OF SUBSTITUTES
▪ This refers to the availability and attractiveness of alternative products or services that can
satisfy the same customer needs or wants.
▪ The threat of substitutes is high when many substitutes offer similar or better value, quality,
performance, or convenience.
▪ The threat of substitutes is low when few substitutes offer inferior or different value, quality,
performance, or convenience
For example:-
In the telecommunication industry, the threat of substitutes is high because there are many
alternative technologies that can provide communication or information services, such as
landlines, mobile phones, internet, email, social media, or video conferencing. Customers can
easily switch to these substitutes if they find them cheaper, faster, or more reliable than the
existing service providers
BARGAINING POWER OF
CUSTOMERS
This refers to the degree of influence that customers have over the price, quality, and terms of
the products or services they buy.
The bargaining power of customers is high when many customers buy in large volumes, have
low switching costs, have high price sensitivity, have low brand loyalty, or have access to
information and alternatives.
The bargaining power of customers is low when few customers buy in small volumes, have high
switching costs, have low price sensitivity, have high brand loyalty, or have limited information
and alternatives.
For example: -
BARGAINING POWER OF
SUPPLIERS
▪ This refers to the degree of influence that suppliers have over the price, quality, and terms of
the products or services they sell.
▪ The bargaining power of suppliers is high when few suppliers offer unique or differentiated
products or services, have high switching costs, have a low threat of substitutes, have a high
threat of forward integration, or have a concentrated customer base.
▪ The bargaining power of suppliers is low when many suppliers offer similar or
undifferentiated products or services, have low switching costs, have a high threat of
substitutes, have a low threat of forward integration, or have a fragmented customer base.
COMPETITIVE RIVALRY
Competitive rivalry is the degree of competition among existing firms in the same industry. It
affects the profitability and attractiveness of the industry, as well as the strategies and
performance of the firms.
Competitive rivalry can take various forms, such as price wars, advertising campaigns, product
innovations, and customer service improvements.
Competitive rivalry is influenced by several factors, such as the number and size of
competitors, the market growth rate, product differentiation, customer loyalty, and exit
barriers.
