PORTER’s
FIVE
FORCES
To analyze competition
of a business
• Concept Overview
• Analysis of each force
• Relevant examples
Blog Series
PORTER’s FIVE FORCES
By – Akshay Kothari
FMS Delhi, Batch of 2021
“If your goal is anything but profitability - if it’s to be
big, or to grow fast, or to become a technology leader -
you’ll hit problems” - Michael Porter
Many a time, competition is imagined as a tug of war between
different players, with each player competing for higher sales or more Rivalry with
market share. But, according to Michael Porter (father of modern existing
strategy), it is much more complex than that. It is not about who is competitors Threat of
the biggest but rather who is the most profitable. new
entrants
Porter came up with five forces that are instrumental in determining
the attractiveness of the industry. The cumulative effect of the five
forces can be so brutal that it can make or break the market’s
attractiveness from the profitability perspective. Porter’s Five-Forces Five Threat of
Model of competitive analysis is a widely-used approach to develop Forces substitutes
corporate strategies across industries. The five forces that impact the
competitiveness of any industry are:
➢ Rivalry amongst existing competitors
➢ Threat of new entrants Bargaining
Power of
➢ Threat of substitutes Bargaining suppliers
➢ Bargaining power of suppliers Power of
consumers
➢ Bargaining power of consumers
The cumulative effect of the five forces can be so brutal that it can make or break the
market’s attractiveness from the profitability perspective.
Different forces take prominence in different industries. In the ocean-
going tanker industry, the key force is probably the buyers (oil
companies), whereas in tires it is OEM buyers along with the tough
competitors. In the steel industry, it is competitors and substitute
materials.
While applying the five forces model you can keep few points in
mind to understand whether the firm can make acceptable profit in
the given competitive environment -
➢ Identify key elements of each competitive force that impact the
frim
➢ Evaluate the importance of each element in the firm
➢ Decide whether the cumulative effect is worth the firm entering or
staying the industry
In this analysis, we’ll delve into the depth of each force and try to list
down some important factors that will help you determine the
strength of each force that could be useful in an industry analysis.
Rivalry among existing competitors
PARETO PRINCIPLE
Your strategy will be successful only if you are able to establish a
competitive advantage over your competing firms. Many a time you
will face retaliatory counter moves like price cuts, feature addition,
warranty extensions, and increased advertising. Intense rivalry can
limit profits for the entire industry. Eg: Under Armour faces stiff
competition from Nike, Adidas, and some newer players in the
performance apparel category. Thus, it is critical for Under Armour to
secure process and fabric patents to ensure competitive advantage.
Listed below are some factors that can be used to establish whether
there is high rivalry among existing firms:
➢ High number of competing firms
➢ Similar size & capabilities of competing firms
➢ Falling demand of Industry products
➢ Switching between products is easy/ No brand loyalty
➢ Barriers of entry are low
➢ High fixed costs between competing firm
➢ Products are perishable
➢ When rivals have excess capacity/inventory
➢ Market has low growth
Intense rivalry can limit profits for the entire industry
Threat of New Entrants
New firms entering the market can increase the intensity of
competitiveness in the industry. The strategy is to monitor the new
first strategies and counter-attack as needed and to capitalize on
existing strengths and opportunities. New firms with high-quality
products and substantial resources like Reliance Jio can squeeze the
profits out of the existing industry. Typically, incumbent firms
respond to new entrants by lowering prices, adding features,
extending warranties, or offering financing options. When Xiaomi
entered the market with lower-priced TV, established players like
Samsung and LG had to lower their prices in response.
Some of the barriers that can help you determine the risk of new
entrants are listed below:
➢ Need for specialized technology/patents
➢ Economies of scale
➢ Customer loyalty
➢ Large capital requirement
➢ Need of established distribution channels
➢ Government regulatory policies/tariffs
➢ Lack of access to raw material
➢ Market saturation
Threat of Substitutes
PARETO PRINCIPLE
Firms often compete with substitute products in other industries.
Eg: plastic container producers are in direct competition with glass
and aluminium containers. Producers of eyeglasses and lenses
compete with laser surgery. Auto rickshaw and kaali-peeli tax drivers
compete with the Ubers and Olas of the world. Traditional retailers
compete with e-commerce. Sugar manufactures are in direct
competition with artificial sweeteners/honey/corn syrup. Newspapers
& magazines are in stiff competition with the internet. Presence of
substitutes put a ceiling on the price that can be charged, otherwise
the customer can easily make the switch to substitutes.
You can measure the strength of the substitute on the basis of these
factors:
➢ Relative price
➢ Degree of closeness with the product
➢ Quality
➢ Capacity to expand production
➢ Market penetration
Bargaining power of suppliers
Suppliers can exert pressure by raising prices or lowering the quality
of the product. Powerful suppliers can squeeze profits out of an
industry. Many a time we see companies pursue backward integration
to gain control or ownership of suppliers. Eg: by raising their prices,
soft drink concentrate producers have squeezed the profits of bottle
manufactures who face intense competition from fruit-based drinks
and other beverages and cannot increase their prices.
You can determine the strength of supplier’s basis these factors:
➢ Concentrated or few suppliers
➢ Product of supplier is unique or differentiated (Difficult to switch)
➢ Industry is not an important customer
➢ Supplier has a possibility of forward integration
Bargaining power of buyers
Buyers can play competitors against each other, force prices down,
and bargain for higher quality or more services at the expense of
company’s profitability. Eg: customers can easily check through
the price of different airlines by using aggregators like Expedia and
Skyscanner, thus forcing airlines to keep prices at check. For a
similar reason, US commercial insurance brokers have gone into
consolidation which enables them to demand higher premiums from
insurance companies, thus offsetting this force.
You can determine the strength of buyer’s on the basis of these
factors:
➢ Buyer volume is large relative to overall sales.
➢ Products are standard or undifferentiated ( Low switching cost)
➢ Product is not important for the buyer
➢ Buyer has full information (Competitive pricing, product specs,
sales process, etc.)
PARETO PRINCIPLE
Let’s apply Porter's five forces to a case scenario to understand how
you can do the same while solving a case.
Case Prompt: You have been hired by a low-cost airline carrier to
evaluate their entry into the Indian market. How would you go about
it?
Solution: Typically, market entry cases start with the evaluation of
whether you should enter the market or not. Let’s see how we can
evaluate this by utilizing Porter's five forces model:
➢ Existing competition: High (Multiple LCC players with Indigo
having 50% market share, customers switch airline easily based on
price, low brand loyalty, high growth market, no direct
differentiation with other players possible)
➢ Threat of new entrant: Low (Barrier of entry - high investment /
Government Regulations)
➢ Threat of substitute: Low (Trains/Buses are indirect competition)
➢ Bargaining power of buyer: High (Easy to switch, pricing
information readily available)
➢ Bargaining power of supplier: High (Airbus & Boeing dominate
the market and have pricing control, also there is no control over
aviation fuel prices)
Porter's five forces clearly indicate what is usually seen in this
industry - intense competition with no control over the
buyers/suppliers resulting in low profitability. This can help you in
making a decision in your case on the basis of the primary objective
of the client.
Thus, to conclude: Porter’s five forces model is an extremely
important tool that can come in handy while performing industry
analysis. This will also come handy while solving market entry cases
based on profitability.
Porter’s five forces model is an extremely important tool that can come in handy
while performing industry analysis
