PORTER’S FIVE FORCES

of
COMPETITIVE ANALYSIS
 FIVE FORCES MODEL
• developed by Michael E. Porter to help
companies assess the nature of an industry’s
competitiveness and develop corporate
strategies accordingly.

• framework that attempts to analyze the level

of competition within an industry and business
strategy development.
 FIVE FORCES MODEL
• analysis tool that uses five industry forces
to determine the intensity of competition in an
industry, its profitability level, and
attractiveness of an industry.
 FIVE FORCES MODEL
• a new way to use effective strategy to
identify, analyze and manage external
factors in an organization’s environment.

• An attractive market place does not mean

that all companies will enjoy similar success
levels. Rather, the unique selling propositions,
strategies and processes will put one
company over the other.
 PORTER’S 5 FORCES
1. Threat of New Entrants
This force determines how easy (or not)
it is to enter a particular industry. If an
industry is profitable and there are few
barriers to enter, rivalry soon intensifies.
 PORTER’S 5 FORCES
1. Threat of New Entrants
Barriers to entry
- The existence of high start-up costs or
other obstacles that prevent new
competitors from easily entering an industry
or area of business.
 PORTER’S 5 FORCES
1. Threat of New Entrants
• Threat of new entrants is high when:
• Low amount of capital is required to enter
a market
• Existing companies can do little to retaliate
• Existing firms do not possess patents,
trademarks or do not have established
brand reputation
• There is no government regulation
• There is low customer loyalty
• Products are nearly identical
• Economies of scale can be easily
achieved
 PORTER’S 5 FORCES
2. Threat of substitutes
It is a products of other industries that
have the ability to satisfy similar needs.
 PORTER’S 5 FORCES
2. Threat of substitutes
• Determining Factors:
• First, if the consumer’s switching costs are
low
• Second, if the substitute product is cheaper
than the industry’s product
• Third, if the substitute product is of equal or
superior quality compared to the industry’s
product, the threat of substitutes is high
• Fourth, if the functions, attributes, or
performance of the substitute product are
• equal or superior to the industry’s product
 PORTER’S 5 FORCES
3. Bargaining power of buyers
• It compels the firms to reduce the
prices and may also demand a
product or service of higher quality at
low price.
• When there many producers and there
is a single customer in the market,
• then that situation is called as
‘MONOPSONY’.
 PORTER’S 5 FORCES
4. Bargaining power of suppliers
• exert influence on the producing firms
by selling them raw materials at higher
prices.
 PORTER’S 5 FORCES
5. Rivalry inside the industry
• intensity of competitive rivalry is the
major determinant of the
competitiveness of the industry.
 PORTER’S 5 FORCES
5. Rivalry inside the industry
• Potential factors:
• Sustainable competitive advantage
through innovation
• Competition between online and offline
companies
• Level of advertising expense
• Powerful competitive strategy
• Firm concentration ratio
• Degree of transparency
Importance of The Porter’s Five
Forces
Using The Tools
We now understand that Porter’s five forces framework
is used to analyze industry’s competitive forces and to
shape organization’s strategy according to the results
of the analysis. But how to use this tool? We have
identified the following steps:

Step 1. Gather the information on each of the five

forces
Step 2. Analyze the results and display them on a
diagram
Step 3. Formulate strategies based on the
conclusions
Limitations