Porter’s five forces model

Purpose
 Michael Porter’s five forces describe the
characteristics of an industry that influence
how profitable firms
in the industry will be.
 They are environmental forces that impact on a
company’s ability to compete in a given
market.
 The purpose of five-forces analysis is to
diagnose the principal competitive pressures in
a market and assess how strong and important
each one is.
The Model
Porter’s Five Forces
Model of Competition
Threat of New
Threat of
Entrants
Threat of
New
New Entrants
Entrants
 Threat of New Entrants
Barriers to Entry:
Economies of Scale

New entrants bring Product Differentiation

increased capacity to the
industry and are often
Capital Requirements
backed by substantial
resources
Switching Costs
New entrants can be
deterred by ‘Barriers to Access to Distribution Channels
Entry’
Cost Disadvantages Independent of Scale

Expected Retaliation

Government Policy
 Porter’s Five Forces
Model of Competition

Threat of New
Entrants

Bargaining
Power of
Suppliers
 Bargaining Power of Suppliers
Suppliers are likely to be powerful if:

Supplier industry is dominated by a few

Suppliers exert power
firms
in the industry by:
Suppliers’ products have few substitutes

Threatening to raise
prices or to reduce quality Buyer is not an important customer to
supplier
Powerful suppliers
Suppliers’ product is an important input to
can squeeze industry
buyers’ product
profitability if firms
are unable to recover Suppliers’ products are differentiated
cost increases
Suppliers’ products have high switching
costs

Supplier poses credible threat of forward

integration
 Porter’s Five Forces
Model of Competition
Threat of
New Entrants
Threat of New
Entrants

Bargaining
Power of Bargaining
Suppliers Power of Buyers
 Bargaining Power of Buyers
Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases are large

relative to seller’s sales

Purchase accounts for a significant fraction of Buyers compete with the

supplier’s sales supplying industry by:

Products are undifferentiated * Bargaining down prices

Buyers face few switching costs * Forcing higher quality

Buyers’ industry earns low profits * Playing firms off of

each other
Buyer presents a credible threat of backward
integration

Product unimportant to quality

Buyer has full information

 Porter’s Five Forces
Model of Competition
Threat of
New Entrants
Threat of New
Entrants

Bargaining
Power of Bargaining
Suppliers Power of Buyers

Threat of
Substitute
Products
 Threat of Substitute Products
Keys to evaluate substitute products:

Products with improving price/performance tradeoffs

relative to present industry products
Examples:
Products with • Digital camera replaces the need for film
similar function • Handy Cam replaces need for digital camera
limit the prices • Electronic security systems in place of security guards
firms can • Fax machines in place of overnight mail delivery
charge Key Questions:

•How many substitute products/services have appeared in

your industry in the last 5 years?
•What are they? How different are they?
•Were they introduced by your organisation or others?
•Which organisation in your industry does the most
Research and Development?
•What happens to price, profits and market share when
substitutes are introduced?
 Porter’s Five Forces
Model of Competition
Threat of
Threat
New of New
Entrants
Entrants

Bargaining
Power of Bargaining
Rivalry Among Competing
Suppliers Power of Buyers
Firms in Industry

Threat of
Substitute
Products
 Rivalry Among Existing
Competitors
Intense rivalry often plays out in the following ways:
Jockeying for strategic position

Using price competition

Staging advertising battles

Increasing consumer warranties or service

Making new product introductions

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off

Advertising battles may increase total industry demand, but may be costly to
smaller competitors
 Example: Coca Cola
 Threat of New entrants: Low
› New “look-a-like” manufacturers
› Controls a large share of the software market

 Bargaining Power of Buyers/Consumers: High

› Intense competition, both amongst branded and unbranded
products.
› Combined purchase power of shops, bars, supermarkets

 Bargaining Power of Suppliers: Low

› Price and availability of ingredients on world market
› Quality, speed, safety, traceability, flexibility of supply chain
› Mostly integrated suppliers or own supply chain
 Example: Coca-cola
 Threat of Substitute products: High
› Fashionable new drinks, energy drinks
› Milk based drinks- coffee, smoothies etc.
› Alcoholic Beverages- beer etc.
› Water,
› Fruit Juices

 Rivalry amongst existing Firms: High

› Pepsi,
› Local Brands
› Promotional actions of competition
 Influencing Porter’s Five Forces

Reducing Reducing
Reducing Reducing Reducing
Bargaining Bargaining
Threat of Threat of Competitive
Power of Power of
New Entrants Substitutes Rivalry
Suppliers Customers

•Differentiation
•Increase
•Partnering
•Partnering •Build the Switching
•Avoid Price
Brand Costs
•SCM wars
•Cut Inter-
Mediarires •Alliances •Alliances
•Increase •Communicate
Loyalty with
Competitors
 Critique

 It does not take into account new business

models & dynamics of the market
 Model assumes relatively static market
structures
 For Industries, with complicated structure, this
model might not prove to be an adequate
analytical tool