PORTER’S FIVE

FORCES
 Porter’s five forces is a simple but
powerful tool for understanding the
competitiveness of your business
environment, and for identifying
your strategy’s potential profitability.
 This is useful because when you
understand the forces in your
environment or industry that can
affect your profitability, you’ll be
able to adjust your strategy
accordingly.
 The tool was created by
Harvard Business School
professor Michael Porter, to
analyze an industry’s
attractiveness and likely
profitability.
The five forces identified by porter are
divided into:
Horizontal forces: threat of substitutes,
threat of new entrants, competitive rivalry
Vertical forces: bargaining power of
suppliers and bargaining power of
customers
PORTER’S FIVE FORCES ARE:
 COMPETITION
Competition in the Industry- refers to
the number of competitors and their
ability to undercut a company. The larger
the number of competitors, along with the
number of equivalent products and
services offers, the lesser the power of a
company.
 Suppliers and buyers seek out a
company’s competition if they are able
to offer a better deal or lower prices.
Conversely, when competitive rivalry
is low, a company has greater power to
charge higher prices and set the terms
to deals to achieve higher sales and
profits.
Ingredients of highly competitive industries;
Slow aggregate industry growth can
lead to rivals competing for market share
as the only to grow .
High fixed cost where idle capacities
come at high cost leading to pressure to
sell at low margins to generate revenue
contribution to the cost based
High exist barriers is where
the productive assets remain in
the market due to their high
remaining values
Customers
Buyer power can lead to lower prices or
having to increase costs by adding
features, services, quantity in order to sell.
Where sellers have too much power over
buyers opportunities can emerge for
others.
Bargaining power can be exercised in different
ways. We might be talking about negotiations.
Bargaining power can also be exercised
indirectly through purchase decisions of end
customers, i.e buying from the lowest-priced
company, deffering the purchased for a
prolonged period, buying pre-owned or not
purchasing at all.
Factors that influence buyer
bargaining power;
Seller’s(supplier’s) switching costs- Switching costs
can affect both sides, suppliers and customers.
Customer switch costs are more prominent. Where
suppliers face switching costs buyers have more
leverage.
Differentiation of products- products are not
differentiated(all competing products have same
value preposition) , compettion will be all about the
price. Buyers will have the upper hand in particular
where there are many competing products.
Power of Suppliers
It addresses how easily suppliers can drive up
the cost inputs, it is affected by the number of
a good or service, how unique these inputs are,
and how much it would cost a company to
switch to another supplier. The fewer the
suppliers to an industry, the more a company
would depend on a supplier.
As a result, the suppliers has more power
and can drive up input costs and push for
other advantages in trade. On the other
hand, when there are many suppliers or
low switching costs between rival
suppliers, a company can keep its input
costs lower and enhance its profits.
Competitors
Potential of New Entrants Into an Industry- a
company’s power is also affected by the force of
new entrants into its market. The less time and
money it costs for a competitor to enter a
company’s market and be an effective
competitor, the more an established company’s
position could be significantly weakened.
An industry with strong barriers to entry
is ideal for existing companies within that
industry since the company would be able
to charge higher prices and negotiate
better terms.
Threats of Substitutes
Substitutes goods or services that can be used in
place of a company’s products or services pose a
threat. Companies that produce goods or services
for which there are no close substitutes will have
more power to increase prices and lock in favorable
terms. When close substitutes are available,
customers will have the option to forgo buying a
company’s product, and a company’s power can be
weakened.