Mohammad Ali Jinnah University

Assignment # 1
Porter Model of Competitive Forces

Name: Namra Adeel

ID: SP19-MBAP-0068
Course: Information System Management
Instructor: Ghous Mohiuddin Qadri
Section: BE Date: 26 March 2019
Porter’s Five Forces analysis is a framework that helps analysing the level of competition

within a certain industry. It is especially useful when

 starting a new business or

 when entering a new industry sector.

According to this framework, competitiveness does not only come from competitors. Rather, the

state of competition in an industry depends on five basic forces:

1. threat of new entrants,

2. bargaining power of suppliers,

3. bargaining power of buyers,

4. threat of substitute products or services, and

5. existing industry rivalry.

Since its introduction in 1979, Michael Porter’s Five Forces has become the de facto framework

for industry analysis. The five forces measure the competitiveness of the market deriving its

attractiveness. The analyst uses conclusions derived from the analysis to determine the

company’s risk from in its industry (current or potential). The collective strength of these forces

determines the profit potential of an industry and thus its attractiveness. When competition in an

industry is strong, firms must supply their products or services at a competitive price and cannot

charge excessive prices and make ‘supernormal’ profits. When any of the five forces are strong,

it is difficult for a business entity to obtain a dominant position in its market, and profitability for

businesses in the industry will therefore be low.

Threat from potential entrants: Competition in a market is affected by the threat of new

business entities coming into the market and adding to the competition. Competitive forces are

reduced when it is difficult for new entrants to break into the market – in other words, when the

‘barriers to entry’ are high.

Several factors might help to create high barriers to entry:

 Economies of scale: Economies of scale are reductions in average costs that are achieved
by producing and selling an item in larger quantities. In an industry where economies of

scale are large, and the biggest firms can achieve substantially lower costs than smaller

producers, it is much more difficult for a new firm to enter the market.

 Capital investment requirements: If a new entrant to the market would have to make a

large capital investment in assets such as factory premises and equipment, this will act as

a barrier to entry, and deter firms from entering the market. This is because they would

lose a substantial amount of money if their new business venture failed and they might

not want this ‘investment risk’.

  Access to distribution channels: In some markets, there are only a limited number of

distribution outlets or distribution channels. If a new entrant will have difficulty in

gaining access to any of these distribution channels, the barriers to entry will be high.

 Know-how: It be time-consuming and expensive for a new entrant to a market to acquire

the ‘know-how’ and experience to be successful.

 Switching costs: Switching costs are the costs that a buyer has to incur in switching from

one supplier to a new supplier. When switching costs are high, it can be difficult for new

entrants to break into a market.

 Government regulation: Regulations within an industry, or the granting of rights, can

make it difficult for new entrants to break into a market.

Threat from substitute products: Competition within a market or industry will be higher when

customers can switch easily to buying alternative products (substitute products).

Bargaining power of suppliers: In some industries, the competitive position of a business entity

might be affected by the bargaining strength of its major supplier or suppliers. When this occurs,

the suppliers might charge high prices to their business customers that these businesses are

unable to pass on to their own customers. As a result, profitability in the industry is low.

Bargaining power of customers: Customers can reduce the profitability of an industry when

they have considerable buying power. Powerful buyers can demand lower prices, or improved

product specifications. Strong buyers also make rival firms compete to supply them with their

products. Porter suggested that buyers might be particularly powerful in the following situations:

 when the volume of their purchases is high relative to the size of the supplier

 when the products of rival suppliers are largely the same (‘undifferentiated’)
  when the costs of switching from one supplier to another are low.

Competitive rivalry: Strong competition forces rival firms to offer their products to customers

at a low price (relative to the product quality) and this keeps profitability fairly low. Porter

suggested that competitor rivalry might be strong in any of the following circumstances:

 when the rival firms are of roughly the same size and economic strength

 when there are many competitors in the industry or market

 when there is only slow growth in sales demand in the market, so that firms are

competing for a fairly fixed total amount of sales and customers.

 when the products of rival firms are largely the same (‘undifferentiated’)

 when the costs of withdrawing from the industry are high, so that even unprofitable

companies are reluctant to leave the market.

Porter’s Five Forces in Action: Sample Analysis of Coca-Cola: The following is a Five

Forces analysis of The Coca-Cola Company and beverage industry:

Threat of New Entrants/Potential Competitors: Medium Pressure

 Entry barriers are relatively low for the beverage industry: there is no consumer switching

cost and zero capital requirement. There is an increasing number of new brands appearing in

the market with similar prices than Coke products

 Coca-Cola is seen not only as a beverage but also as a brand. It has held a very significant

market share for a long time and loyal customers are not very likely to try a new brand.

Threat of Substitute Products: Medium to High pressure

 There are many kinds of energy drink s/soda/juice products in the market. Coca-

Cola doesn’t really have an entirely unique flavour. In a blind taste test, people can’t tell the

difference between Coca-Cola and Pepsi.

The Bargaining Power of Buyers: Low pressure

 The individual buyer no pressure on Coca-Cola

 Large retailers, like Wal-Mart, have bargaining power because of the large order quantity,

but the bargaining power is lessened because of the end consumer brand loyalty.

The Bargaining Power of Suppliers: Low pressure

 The main ingredients for soft drink include carbonated water, phosphoric acid, sweetener,

and caffeine. The suppliers are not concentrated or differentiated.

 Coca-Cola is likely a large, or the largest customer of any of these suppliers.

Rivalry Among Existing Firms: High Pressure

 Currently, the main competitor is Pepsi which also has a wide range of beverage products

under its brand. Both Coca-Cola and Pepsi are the predominant carbonated beverages

and committed heavily to sponsoring outdoor events and activities.