Porter’s Five Forces Model (1979)

Michael E. Porter – developed the tool to analyze INDUSTRY attractiveness and profit potential. It is
considered a fundamental tool for strategic analysis of the competitive forces in an industry. Porter
identified five forces that are in action in each industry. This model guides businesses in determining
the intensity of competition & potential profitability within their market, helping them better
understand where power lies in their sector.

The SWOT analysis is considered too "macro" for many dealing with the challenges of specific
industries. Porter expanded the concept of competition to include four others: the bargaining power of
suppliers and buyers, the threat of new entrants, and the threat of substitute products or services.

“The strength of the five forces determines how much profit an industry can keep long-term.”
It is applied as:
1. Corporate Strategic Planning → Designing the business portfolio
→ Should we enter, stay, or exit this industry/SBU?
2. Marketing Planning → Situation Analysis (External environment)
→ Part of the “Competitive Forces” section in every marketing plan

I. Threat of New Entrants

How easy is it for new companies to enter?
High threat → low profit, e.g., Airlines

Industries where new firms can enter more easily almost always have lower profit margins, and the
firms involved each have less market share.

The sector for local restaurants has relatively low entry requirements: there are no significant
investments or regulatory hurdles before opening to the public. Thus, it's also the case that your
favourite restaurant may not stay open for long, given the hypercompetitive environment and constant
entrance of new restaurants opening.

Here are factors in measuring how many new entrants threaten an industry:

 Economies of scale: Industries where large-scale production leads to lower costs face less of
a threat from new entrants. New firms would need to achieve a similar size to compete on
price, which might be difficult or costly.
 Product differentiation: When existing firms have strong brand identities/customer loyalty,
it's harder for new entrants to gain market share, reducing the threat of entry.
 Capital requirements: High start-up costs for equipment, facilities, etc., can deter new
entrants, as starting a car manufacturing business requires significant investment
 Access to distribution channels: If existing firms control the distribution channels—retail
stores, online platforms, cable infrastructure, etc.—then new entrants would need to find a
way to replicate that structure while competing with the established firms on price, a tricky
proposition.
 Regulations: Licenses, safety standards, and other regulatory standards can create barriers,
making it too ungainly or costly for new firms to enter the market. Examples would include
those looking to build new hotels in downtown areas or supply power to a region.
 Switching costs: If it's costly or difficult for customers to switch from existing firms to new
entrants, the threat of entry is lower.

II. Bargaining Power of Suppliers

Can suppliers raise prices or reduce quality?
Strong suppliers → low profit

When the power of suppliers in an industry is high, this raises costs or otherwise limits the resources a
firm needs. Here are some factors that measure the supplier power of an industry:

 The number of suppliers: When few firms can give a company something it needs to stay in
business, each has greater negotiating power. They can raise prices or reduce quality without
fear of losing business.
 Uniqueness: If a supplier provides a unique product or it's not easy to find a substitute, it is
more dominant. Businesses can't easily switch to another supplier.
 Switching costs: If it's costly or time-consuming to switch suppliers, then they have more
power. Businesses are less likely to switch, even if prices increase.
 Forward integration: If suppliers can move into the buyer's industry, they have more power.
They already have access to the necessary supplies, making it difficult for their former buyers
to compete once they decide to enter the market themselves.
 Industry importance: Some sectors are tightly intertwined, such as automotive suppliers and
the major auto companies or the semiconductor and tech industries, which can balance the
power between the suppliers and those in the sector. This is because the supplier needs these
buyers to do well so that it can, too. When a supplier can just as easily sell its products
elsewhere, that gives it a great deal more power.

III. Bargaining Power of Buyers

Can customers force prices down or demand more?
Powerful buyers → Low profit, e.g., Walmart is forcing P&G prices down

When customers have more strength, they can exert pressure on businesses to provide better products
or services at lower prices. This force intensifies under certain conditions:
  The number of buyers: The fewer the buyers, the more they have power. In sectors like
aerospace manufacturing, each major airline, the industry's customers, has significant
leverage in negotiations and can demand favorable terms because the sellers depend on their
business.
 Purchase size: Just like one visits a big store like Hyperstar to buy in bulk for a cheaper per-
unit cost, one can buy in large volumes and can negotiate better terms and discounts.
 Switching costs: In industries like telecommunications, where it's easy for consumers to
switch providers, companies that offer competitive terms.
 Price sensitivity: In the fast-fashion industry, where customers are highly price-sensitive,
brands must keep their prices low to attract cost-conscious consumers.
 Informed buyers: In many sectors, the customers are savvy, know the competitive terrain
well, and thus can negotiate better prices.

Porter chose the metaphor of forces because they aren't static, so businesses must constantly adjust
their strategies as forces in an industry change.

IV. Threat of Substitutes

Are there alternative solutions outside the industry?
Many substitutes → low profit, e.g, streaming vs cinema,

When customers can find substitutes for a sector's services, it's a major threat to the companies in that
industry. Here are some ways that this threat can be magnified:

 Relative price performance: If the cost of a substitute is lower and its performance is
comparable or better, customers are likely to switch to the substitute. For instance, streaming
services like Netflix became a substitute for traditional cable TV, providing a lower price that
soon threatened the cable industry.
 Customer willingness to go elsewhere: The threat is high if buyers find it easy to switch to a
substitute. For example, in the early 2010s, customers found switching from taxis to ride-
sharing apps like Uber cheaper and easier.
 The sense that products are similar: If buyers perceive that there are few differences
between your product and a substitute, even if there are, they may be more likely to switch.
 Availability of close substitutes: Though this sounds the same as the last bullet point, you
must strategize differently around it. There are times when potential substitutes are very
different from a company's products, but consumers still treat them as the same. But in other
cases, there are genuinely similar products in the market, & the threat of substitutes is high,
such as between brand-name & generics.

V. Rivalry among Existing Competitors

How intense is the price/promotion war?
Cut-throat rivalry → low profit, e.g., Airlines, smartphones, cola wars

Porter's first force is what we usually mean when discussing business competition. We think of Pepsi
and Coca-Cola for soft drinks, Apple and Samsung for smartphones, Nike and Adidas for sneakers,
and Ford and General Motors for autos.

Indeed, some of these rivalries are so influential that they can lead to price wars, high-priced
marketing battles, and races for slight advances that could mean a competitive advantage. These
tactics can stimulate companies to make ever better products, but also erode profits and market
stability. Several factors contribute to the intensity of competitive rivalry in an industry:
  The number of competitors: The more competitors in an industry, the fiercer the rivalry, as
each fights for scraps of market share.
 Industry growth: In an expanding industry, competition is usually less dramatic because the
market is growing so fast that competitors have little need to fight for customers. However, in
a stagnant or declining industry, competition can be ferocious as firms fight for a larger piece
of a shrinking pie, as today’s print media industries
 Similarities in what's offered: When the products or services in a market are awfully similar
(think of the lower page of results in any Amazon product search), competition tends to be
intense because customers can easily switch. However, if a company offers a unique product
or service or has earned brand loyalty, this can reduce competitive rivalry. Apple, Inc. comes
to mind in tech goods, charging a higher price given its style, technology, or whatever makes
it unique.
 Exit barriers: When it's difficult or costly for companies to leave the industry due to
specialized assets, contractual obligations, or emotional attachment, they may choose to stay
and compete, even if the market's prospects grow dimmer by the day. The airline industry is a
classic example. Airlines have high costs for their assets, contractual obligations (leasing
agreements and labor contracts), and regulatory requirements, which means that when airlines
face a shrinking market—or even an unprofitable route—they can't retreat from the market
quickly.
 Fixed costs: Porter notes that if an industry has high fixed costs, companies have a "strong
temptation" to cut prices rather than slow production when demand slackens. Paper and
aluminium manufacturing are two good examples that Porter gives.

How Does Porter's Five Forces Differ from SWOT Analysis?

Both are strategic planning tools, but they serve different purposes. The five-force model analyzes the
competitive environment of a particular industry, looking at its intensity and the bargaining power of
suppliers and customers. SWOT analysis, meanwhile, is broader and assesses a company's internal
strengths and weaknesses as well as its external opportunities and threats.

It can assist in strategic planning by pinpointing areas where the company excels and faces obstacles,
helping to align the company's strategy with its internal resources a

Force Makes the force STRONG (dangerous) Makes the force WEAK (good for profits)
New Low barriers: no patents, low capital, no High barriers: patents, huge investment,
Entrants brand loyalty regulations

Suppliers Few suppliers, a unique product, and high Many suppliers, commodity products, and
switching costs easy to switch
Buyers Few buyers concentrated, low switching Many small buyers, high switching costs,
cost, price-sensitive and luxury buyers
Substitutes Cheap & good alternatives available No close substitutes or very expensive ones

Rivalry Many equal-sized competitors, slow Few players, fast growth, differentiated
growth, and high fixed costs products
Examples Airlines, Luxury Goods,
E-Commerce: Fashion industry Pharmaceuticals with Patents,