PORTERs FIVE FORCES

MODEL
PREPARED BY:
AMITANSHU SRIVASTAVA
INTRODUCTION
The Five Forces model of Porter is an outside-in
business unit strategy tool that is used to make an
analysis of the attractiveness (value...) of an industry
structure.

It captures the key elements of industry competition.

PORTERs FIVE FORCES
MODEL Potential
entrants

Threat of
new entrants

Bargaining power Industry competitors

of suppliers
Suppliers Buyers
Rivalry among Bargaining power
existing firms of buyers

Threat of
substitutes

Substitute
products
PORTERs FIVE FORCES
MODEL Threat
Threat of
of
Threat of New
New
New
Entrants
Entrants
Entrants
 Threat of New Entrants
Economies of Scale

Barriers to Product Differentiation

Entry
Capital Requirements

Customer Switching Costs

Access to Distribution Channels

Government Policy

Expected Retaliation
PORTERs FIVE FORCES
MODEL Threat of
Threat of New
New
Entrants
Entrants

Bargaining
Power of
Suppliers
 Bargaining Power of Suppliers

Suppliers are likely to be powerful if:

Suppliers exert
power in the Supplier industry is dominated by a few
industry by: firms
* Threatening to raise Suppliers products have few substitutes
prices or to reduce
Buyer is not an important customer to
quality supplier
Powerful suppliers
can squeeze Suppliers product is an important input to
industry buyers product
profitability if firms Suppliers products are differentiated
are unable to
recover cost Suppliers products have high switching
costs
increases
PORTERs FIVE FORCES
MODEL Threat of
Threat
Newof New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers
 Bargaining Power of Buyers

Buyer groups are likely to be powerful if:

Buyers compete with
Buyers are concentrated
the supplying industry
Purchase accounts for a significant fraction of by:
suppliers sales

Products are undifferentiated * Bargaining down prices

Buyers face few switching costs * Forcing higher quality
Buyer presents a credible threat of backward * Playing firms off of
integration
each other
Buyer has full information
PORTERs FIVE FORCES
MODEL Threat of
Threat
Newof New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers

Threat of
Substitute
Products
Threat of Substitute Products
Keys to evaluate substitute products:
Products with improving
price/performance tradeoffs
Products with relative to present industry
similar products
function limit
the prices
firms can Example:
charge
Electronic security systems in place
of security guards

Fax machines in place of overnight

mail delivery
PORTERs FIVE FORCES
MODEL Threat of
Threat of New
New
Entrants
Entrants

Bargaining Rivalry Among Bargaining

Power of Competing Firms in Power of
Suppliers Industry Buyers

Threat of
Substitute
Products
Rivalry Among Existing Competitors

Intense rivalry often plays out in the following

ways:
Using price competition

Staging advertising battles

Increasing consumer warranties or service

Making new product introductions

Occurs when a firm is pressured or sees an

opportunity
Price competition often leaves the entire industry worse off

Advertising battles may increase total industry demand, but may

be costly to smaller competitors
Coca-cola
Traditional competition:
Prices of Pepsi, local brands
Market share
Promotional actions of competition

New entrants:
New look-a-like manufacturers

Substitute products:
Fashionable new drinks, milk drinks, coffee, beer, ...
Coca-cola
Suppliers:
Price and availability of ingredients on world market
Quality speed safety, traceability, flexibility of supply
chain

Buyers/consumers:
High as a result of intense competition both among
branded and unbranded products.
Combined purchase power of shops, bars, supermarkets
 Competitive Advantage
The Competitive Advantage model of Porter learns that
competitive strategy is about taking offensive or defensive
action to create a defendable position in an industry, in order
to cope successfully with competitive forces.

Companies can combat the pressure of the five forces and

create competitive advantages.

There are 2 basics types of Competitive Advantage :

Cost leadership (low cost)
Differentiation
Strengths of five forces
model:
The model is strong tool for competitive analysis at
industry level.

It provides useful input for performing a SWOT

analysis.
 Limitations
Inside-out strategy is ignored (core competence)

It does not cope with synergies and interdependencies

within the portfolio of large corporations (parenting
advantage)

The environments which are characterized by rapid,

systemic and radical change require more flexible, dynamic
or emergent approaches to strategy formulation (disruptive
innovation)

Sometimes it may be possible to create completely new

markets instead of selecting from existing ones (blue ocean
strategy)