Module 3: Porter's Five Forces

is a framework for analyzing a company's competitive environment. The

number and power of a company's competitive rivals, potential new market entrants, suppliers, customers, and substitute
products influence a company's profitability.
 

Michael Eugene Porter (born May 23, 1947) is

an American academic known for his theories on
economics, business strategy, and social causes.
He is credited for creating Porter's five forces
analysis, which is instrumental in business strategy
development today.
Contributions: 
Porter hypothesis; Porter's five forces analysis...

Born: Michael Eugene Porter; May 23, 1947 ...

Alma mater: Princeton University (BSE); Harvard ...

BY: CLARISA TAGALOG-SABIO, D. M.

MODULE 3- PORTER’S 5 FORCES ANALYSIS
 Starbucks Coffee Five Forces Analysis (Porter’s Model) &
Recommendations
UPDATED ONUPDATED ON FEBRUARY 21, 2019 BY ROBERTA GREENSPAN

Starbucks HQ
The Starbucks Center (formerly the SODO Center) is the world headquarters of the
coffeehouse chain Starbucks. It is located in the SoDo neighborhood of Seattle, Washington;
the area is part of the city's large industrial district.
Address: 2401 Utah Avenue South; Seattle, Washington.
Location: cor. 1st Avenue South & South Lander
A Starbucks café at Beijing Capital International Airport .

A Porter’s Five Forces analysis of Starbucks Corporation reveals that competition, customers, and
substitutes are major strategic concerns among the external factors that impact the coffee and coffeehouse
chain industry environment.

Starbucks Corporation (Starbucks Coffee Company) successfully grows through management effectiveness

in addressing the impacts of the five forces in the global coffee industry and coffeehouse industry
environments. The company deals with external factors, such as the ones outlined in this Five Forces
analysis of the business.

Michael E. Porter’s Five Forces analysis model evaluates the industry environment through relevant external
factors that define the competitive landscape. The analysis model provides information for strategic
management to address the five forces, namely, competitive rivalry, the bargaining power of customers or
buyers, the bargaining power of suppliers, the threat of substitution, and the threat of new entrants. In this
external analysis case, Starbucks operates in a business environment that involves strong competition with
other coffeehouse companies, as well as food and beverage businesses like Dunkin’ Donuts, McDonald’s, 
Wendy’s, Burger King, and Subway.

The SWOT analysis of Starbucks Corporation shows sufficient strengths to counter the force of such
competitors, although the company needs to continue strengthening its competencies to continue growing
despite the competition.

In the strategic management of Starbucks Coffee Company, it is crucial to account for the effects of
external factors on the multinational business. This Porter’s Five Forces analysis of the coffeehouse chain
highlights some of the most notable factors that the company’s strategies must consider. These strategies
are focused on ensuring competitive advantage while fulfilling 
Starbucks’s corporate mission and vision statements.
Summary & Recommendations:
Porter’s Five Forces Analysis of Starbucks Corporation
Summary. The strong force of competition is the combined effect of the external factors identified in
this Five Forces analysis. In this regard, the most significant forces for Starbucks Coffee Company’s
strategic consideration are competitive rivalry, the bargaining power of customers, and the threat of
substitutes. Still, the other forces also influence the company’s business performance. In summary, the
following are the intensities of the Five Forces in Starbucks Corporation’s industry environment:

Competitive rivalry or competition – Strong Force

Bargaining power of buyers or customers – Strong Force
Bargaining power of suppliers – Weak Force
Threat of substitutes or substitution – Strong Force
Threat of new entrants or new entry – Moderate Force

Recommendations.
In general, addressing the external business environment based on the results of this Porter’s Five Forces
analysis, Starbucks’s strategic goal must focus on maximizing the strengths and related competencies of the
coffeehouse business. For example, the company can implement strategies to make its brand even
stronger. This recommendation is intended to address the strong force of competitive rivalry, the strong
bargaining power of buyers, and the strong threat of substitution. Specific to the force of competition, a
recommendation is to boost Starbucks Corporation’s competitive advantages. For instance, the company
can improve the diversity of its supply chain as a way of increasing resource access and production stability.
It is also recommended that Starbucks increase its marketing aggressiveness to attract and retain more
customers.
Competitive Rivalry or Competition with Starbucks Coffee Company
(Strong Force)
Starbucks faces the strong force of competitive rivalry or competition in the food service and coffeehouse
industries. In the Five Forces analysis model, this force pertains to the influence of competitors on each
other and the industry environment. In this case of Starbucks Coffee Company, the following external
factors contribute to the strong force of competition:

 Large number of firms (strong force)

 Moderate variety of firms (moderate force)
 Low switching costs (strong force)
The large number of firms is an external factor that intensifies competitive rivalry. Starbucks Corporation
has many competitors of different sizes. In relation, the population of competitors is moderate varied in
terms of specialty and strategy.

In this Five Forces analysis of Starbucks, such moderate variety further strengthens the level of
competition in the industry.

In addition, competition is strengthened because of the low switching costs, which are the disadvantages
to consumers when shifting from one provider to another. For example, this case involves minimal
disadvantages to consumers who transfer from the company to other coffeehouses. Based on this
component of the Five Forces analysis, competition is among the company’s top-priority challenges. 
Starbucks Corporation’s generic strategy and intensive growth strategies are a reflection of strategic
responses to competition.
Bargaining Power of Starbucks’s Customers/Buyers (Strong Force)
Starbucks Coffee Company experiences the strong force or bargaining power of buyers or customers. In
Porter’s Five Forces analysis model, this force is based on the influence of individual customers and
groups of customers on the international business environment. In Starbucks Corporation’s case, the
following external factors contribute to the strong bargaining power of customers:

 Low switching costs (strong force)

 High substitute availability (strong force)
 Small size of individual buyers (weak force)
In this component of the Five Forces analysis model of the business, the bargaining power of buyers is
among the most significant forces affecting the company.

Based on the low switching costs, customers can easily shift from Starbucks to other brands. In addition,
the high substitute availability means that customers can stay away from Starbucks if they want to,
because there are many substitutes like instant beverages from vending machines.

These strong factors overshadow the fact that individual purchases are small compared to the company’s
total revenues. The small size of individual purchases equate to the weak influence of individual buyers on
the business. Despite such weakness, the other two external factors strengthen the bargaining power of
customers.

Thus, this component of the Five Forces analysis shows that the bargaining power of customers is a top-
priority strategic issue. Starbucks Corporation’s marketing mix or 4Ps provide support for brand
strengthening to partially address the bargaining power of consumers.
Bargaining Power of Starbucks Coffee’s Suppliers (Weak Force)
Starbucks Coffee faces the weak force or bargaining power of suppliers. Porter’s Five Forces analysis
model considers this force as the influence that suppliers have on the company and its industry
environment. The following external factors contribute to the weak bargaining power of suppliers on
Starbucks Corporation:

 Moderate size of individual suppliers (moderate force)

 High variety of suppliers (weak force)
 Large overall supply (weak force)
The moderate size of individual suppliers is an external factor that imposes a moderate force on Starbucks.
However, the high variety of suppliers weakens their bargaining power. For example, suppliers have
various strategies and competencies that they use to compete against each other, with the aim of gaining
more revenues by supplying more materials, such as coffee beans, to Starbucks Corporation.

The bargaining power of suppliers is further weakened because of the large overall supply. For instance,
there are many suppliers of coffee and tea around the world. This external factor limits the influence of
individual suppliers.

The overall effect of the external factors in this component of the Five Forces analysis is the weak force or
bargaining power of suppliers on the company. Another consideration is the company’s policy of
diversifying its supply chain as a way of addressing the trends identified in the 
PESTEL/PESTLE analysis of Starbucks Coffee Company.

Such policy weakens suppliers’ power. As a result, suppliers’ bargaining power is a minor strategic issue in
managing the business.
Threat of Substitution or Substitutes to Starbucks Products
(Strong Force)
Starbucks Corporation experiences the strong force or threat of substitution. In the Five Forces analysis
model, this force pertains to the impact of substitute goods or services on the business and its external
environment. The following external factors contribute to the strong threat of substitution against
Starbucks:

 High substitute availability (strong force)

 Low switching costs (strong force)
 High affordability of substitute products (strong force)
This component of the Five Forces analysis indicates that substitutes have strong potential to negatively
impact Starbucks Coffee’s business. The high availability of substitutes makes it easy for consumers to
buy these substitutes instead of Starbucks products.

For example, substitutes like ready-to-drink beverages, instant beverage powders and purees, and food
and other beverages are readily available from various outlets, such as fast food and fine-dining
restaurants, vending machines, supermarkets and grocery stores, and small convenience stores.

In addition, the low switching costs further strengthen the threat of substitutes, as it is easy for
consumers to buy substitutes instead of Starbucks products. Moreover, many of these substitutes are
affordable and cost less than the company’s products.

Thus, this Porter’s Five Forces analysis of Starbucks Coffee Company determines that the threat of
substitutes is a high-priority strategic management concern.
Threat of New Entrants or New Entry (Moderate Force)
Starbucks Corporation faces the moderate force or threat of new entry. In Porter’s Five Forces analysis
model, this force refers to the effect of new players or new entrants in the industry. In this business case,
the following external factors contribute to the moderate threat of new entrants against Starbucks:

 Moderate cost of doing business (moderate force)

 Moderate supply chain cost (moderate force)
 High cost of brand development (weak force)
The moderate cost of doing business is associated with the variability of the actual cost of establishing
and maintaining operations in the coffeehouse industry.

For example, the cost of operating a small coffeehouse is lower compared to the cost of operating a
coffeehouse chain. In relation, smaller cafés have lower supply needs and corresponding supply chain
costs. These external factors enable smaller firms to do business and compete against Starbucks
Corporation. On the other hand, brand development is costly.

In the context of the Five Forces analysis model, this condition reduces the threat of substitution. For
example, small coffeehouses do not have enough resources to develop their brands. Also, brand
development typically requires years to reach the level of strength of the Starbucks brand. The
combination of these external factors imposes the moderate force or threat of substitutes against the
company.

Thus, this Five Forces analysis shows that the threat of substitution is a significant but limited issue in
Starbucks Corporation’s strategic management.
Apple Inc. Five Forces Analysis (Porter’s Model)
UPDATED ONUPDATED ON FEBRUARY 22, 2019 BY EDWARD FERGUSON
MacBook Pro, iPad and iPhone from Apple .

A Five Forces analysis (Porter’s Model) of Apple Inc. reveals an industry environment where the
company must prioritize the external factors of competition and the bargaining power of buyers in the
consumer electronics, computing technology, and online digital content distribution markets. (Photo: Public
Domain)

Apple Inc. has achieved success as one of the most valuable companies in the world. This Five Forces
analysis gives insights about the external factors influencing the company’s success. Michael E. Porter’s Five
Forces framework is a strategic management tool for evaluating the five forces affecting the business
organization: customers, suppliers, substitutes, new entrants, and competition. A Five Forces analysis of
Apple Inc. sheds light on what the company does to ensure industry leadership despite the negative effects
of external factors in the competitive landscape of the computer software and hardware, consumer
electronics, and online digital content distribution markets, which involve firms like Microsoft, Google, 
Amazon, Walmart, Samsung, Dell, Sony, and Lenovo. Established in 1976, Apple has succeeded to become
a dominant competitor in the industry under the leadership of Steve Jobs. Based on this Five Forces
analysis, the company addresses competition and the bargaining power of buyers, which are among the
most significant external factors impacting the business. Also, this Five Forces analysis indicates that Apple
Inc. must focus its strategic efforts on these two external factors to keep its leadership in the industry.

This Five Forces analysis (Porter’s model) of external factors in Apple Inc.’s industry environment points to
competitive rivalry or intensity of competition, and the bargaining power of buyers or customers as the
primary forces for consideration in the company’s strategic formulation. Nonetheless, all of the five forces
influence the company’s business situation, together with the effects of others external factors, such as the
ones identified in the PESTEL/PESTLE analysis of Apple Inc.
Five Forces Analysis of Apple Inc. – Overview
Apple’s strategies are partly based on the need to address forces in the external business environment.
These forces can limit or reduce the firm’s market share, revenues, profitability, and business
development potential. This Five Forces analysis, based on Porter’s framework, points to the following
strengths or intensities of external factors in Apple Inc.’s industry environment:

Competitive rivalry or competition: Strong force

Bargaining power of buyers or customers: Strong force
Bargaining power of suppliers: Weak force
Threat of substitutes or substitution: Weak force
Threat of new entrants or new entry: Moderate force

Considering the five forces, Apple must focus its attention on competitive rivalry and the bargaining
power of buyers.

This external analysis supports the company’s current position of continuous innovation. Through rapid
and continuous innovation, Apple effectively addresses the five forces in its external environment,
although much of the company’s effort is to strengthen its position against competitors and to keep
attracting customers to Apple products.

An applicable recommendation is to intensify research and development for innovation to

develop novel products that will complement the iPhone, the iPad, and other existing
products.
Competitive Rivalry or Competition with Apple (Strong Force)
Apple faces the strong force of competitive rivalry or competition. This component of Porter’s Five Forces
analysis model determines the intensity of the influence that competitors have on each other. In Apple’s
case, this influence is based on the following external factors:

High aggressiveness of firms (strong force)

Low differentiation of products (strong force)
Low switching cost (strong force)
Companies like Samsung and LG aggressively compete with Apple. Such aggressiveness, observable in
rapid innovation, aggressive advertising, and imitation, impose a strong force in the industry environment.
Moreover, in terms of product differentiation, available products in the market are generally similar in
fulfilling specific purposes. For example, many popular apps are available for Android and iOS devices,
and cloud storage services from different companies are available to iOS users.

In Porter’s Five Forces analysis model, this condition creates a strong force by making it easy for
customers to switch to other sellers or providers.

On the other hand, the low switching cost means that it is easy for customers to switch from Apple to
other brands, based on price, function, accessibility, network externalities, and related concerns.

The combination of these external factors in this part of the Five Forces analysis leads to
tough competitive rivalry that is among the most significant considerations in Apple’s
strategic management.
Bargaining Power of Apple’s Customers/Buyers (Strong Force)
The bargaining power of buyers is strong in affecting Apple’s business. This component of Porter’s Five
Forces analysis model determines how buyers’ purchase decisions and related preferences and
perceptions impact businesses. In Apple Inc.’s case, buyers’ strong power is based on the following
external factors:

Low switching cost (strong force)

Small size of individual buyers (weak force)
High buyer information (strong force)
It is easy for customers to change brands, thereby making them powerful in compelling companies like
Apple to ensure customer satisfaction.

On the other hand, each buyer’s purchase is small compared to the company’s total revenues.

Porter’s Five Forces framework indicates that this condition makes customers weak at the individual level.
However, the availability of detailed comparative information about competing products’ features
empowers buyers to shift from one provider to another.

This external factor enables buyers to exert a strong force on Apple and other brands.

Thus, this part of the Five Forces analysis shows that Apple must include the bargaining
power of buyers or customers as one of the most significant strategic variables in the
business.
Bargaining Power of Apple’s Suppliers (Weak Force)
Apple Inc. experiences the weak force of the bargaining power of suppliers. This component of Porter’s
Five Forces analysis model indicates the influence of suppliers in imposing their demands on the
company and its competitors. In Apple’s case, suppliers have a weak bargaining power based on the
following external factors:

Moderate to high number of suppliers (weak force)

Moderate to high overall supply (weak force)
High ratio of firm concentration to supplier concentration (weak force)
The global size of its supply chain allows Apple Inc. to access many suppliers around the world.

In Porter’s Five Forces analysis context, the resulting high number of suppliers is an external factor that
presents only a weak to moderate force against the company.

In relation, the moderate to high overall supply of inputs, such as semiconductors, makes individual
suppliers weak in imposing their demands on firms like Apple. Also, the ratio of firm concentration to
supplier concentration further limits suppliers’ power and influence in the industry. This external factor
reflects the presence of a small number of big companies like Apple and Samsung, in contrast to a larger
number of medium-sized and big suppliers.

Thus, this part of the Five Forces analysis shows that the bargaining power of suppliers is a
minor issue in developing Apple Inc.’s strategies for supply chain management, value chain
effectiveness, innovation, and industry leadership.
Threat of Substitutes or Substitution (Weak Force)
The competitive threat of substitution is weak in affecting Apple Inc.’s computing technology, consumer
electronics, and online services business. This component of Porter’s Five Forces framework determines
the strength of substitute products in attracting customers. In Apple’s case, substitutes exert a weak force
based on the following external factors:

Moderate to high availability of substitutes (moderate force)

Low performance of substitutes (weak force)
Low buyer propensity to substitute (weak force)
Some substitutes to Apple products are readily available in the market.

For example, instead of using iPhones, people can use digital cameras to take pictures, and landline
telephones to make calls.

In Porter’s Five Forces analysis model, this external factor exerts a moderate force in the industry
environment. However, these substitutes have low performance because they have limited features. Many
customers would rather use Apple products based on convenience and advanced functions. This condition
makes substitution a weak force in impacting the company’s business. Also, buyers have a low propensity
to substitute. For instance, customers would rather use smartphones than go through the hassle of
buying and maintaining a digital camera, a cellular phone, and other devices.

This part of the Five Forces analysis shows that Apple does not need to prioritize the threat of
substitution, specifically in management decisions in business processes like marketing,
market positioning, and product design and development.
Threat of New Entrants or New Entry (Moderate Force)
Apple Inc. experiences the moderate force of the threat of new entrants. This component of Porter’s Five
Forces analysis model indicates the effect and possibility of new competitors entering the market. In
Apple’s case, new entrants exert a moderate force based on the following external factors:

High capital requirements (weak force)

High cost of brand development (weak force)
Capacity of potential new entrants (strong force)
Establishing a business to compete against firms like Apple Inc. requires high capitalization. Also, it is
extremely costly to develop a strong brand to compete against large companies like Apple.

These external factors make new entrants weak. However, there are large firms with the financial
capacity to enter the market. For example, Google has already done so through products like Nexus
smartphones. Samsung also used to be a new entrant.

These examples show that there are large companies that have the potential to directly compete against
Apple Inc.

Thus, the overall threat of new entry is moderate. This part of the Five Forces analysis shows that Apple
must maintain its competitive advantage through innovation and marketing to remain strong against new
entrants’ moderate competitive force.
Conclusion:
Every company and business want to be at the top of
the market. To do this you not only have to focus on
yourself, but you also have to take a look at your
competitors and the trends of the market. With the help
of Porter’s Five Forces, you can examine your business
for different factors and make intelligent and efficient
moves to get in the best position.
ACTIVITY #3