Porter’s Five Forces
Model
Porter’s Five Forces Model
• Porter’s Five Forces is a classic model that organizations
use to assess their competitive environment and make
informed decisions.
• The framework, developed by renowned Harvard
Business School professor Michael E. Porter, lets
companies evaluate the environmental forces shaping
the future of their industry.
What Are Porter's Five Forces?
• Michael E. Porter’s Five Forces framework is one of the most widely
regarded business strategy tools.
• Born out of his work in 1979, this framework offers organizations a
systematic approach to assessing their competitive environment and
making strategic decisions that can influence their long-term success.
• Competitive Rivalry
• Supplier Power
• Buyer Power
• Threat of Substitution
• Threat of New Entrants
1. Competitive Rivalry (1 of 2)
• Competitive Rivalry evaluates the number of existing players and how
established they are in the industry.
• How many competitors do you have?
• Are their products better than your own?
• In industries with cutthroat competition, companies often lower prices
and invest in expensive marketing campaigns to increase market share.
• That means suppliers and buyers can quickly move towards your
competitors.
• Conversely, businesses in less competitive sectors enjoy more
comfortable profit margins.
1. Competitive Rivalry (2 of 2)
Example:
• In the retail world, competition is intense.
• Businesses of all sizes demand consumers’ attention, often
resulting in price wars and thin profit margins.
• Dominant companies in this sector—including Walmart and
Amazon—use various strategies to outshine their rivals. They
often lower prices, optimize their supply chain and expand
their product offerings, which makes it difficult for small
businesses to compete with them.
2. Supplier Power (1 of 2)
• Suppliers provide the essential ingredients for a business’s operations. How much
influence does a supplier wield over a company’s profits?
• When only a few suppliers can provide a product, they can dictate terms and pressure
businesses to accept higher prices.
• Even if terms are unfavourable, some get pressured to take them because of the costs of
moving to another supplier.
• In an ideal scenario, companies must be able to diversify their supplier base.
• By reducing their dependency on a supplier, businesses can safeguard their supply
chains, control costs and maintain a competitive edge.
2. Supplier Power (2 of 2)
• Finding reliable suppliers and securing favorable terms
is vital to success.
• Large retailers such as Costco have immense buying
power, so they can negotiate advantageous deals with
suppliers and acquire quality products.
• Most companies choose suppliers based on strict
criteria such as cost-effectiveness, quality and
reliability.
3. Buyer Power (1 of 2)
• Buyer Power refers to the influence customers wield
over a business.
• If an industry has strong buyer power, consumers can
demand lower prices, higher quality or improved service,
affecting a company’s profitability.
• Buyers wield more power in a market with fewer
customers and more sellers. In this scenario, businesses
can differentiate themselves by formulating unique value
propositions to justify their higher prices.
• Some examples include loyalty programs, excellent
customer service and novel experiences.
3. Buyer Power (2 of 2)
• The electronics industry provides a compelling example of buyer power
within Porter’s Five Forces framework.
• Consumers can access various electronic products, from smartphones and
laptops to smartwatches and home entertainment systems.
• Price comparisons are easily accessible online, so finding the best deals
and discounts is easy.
• Customers in the retail industry are discerning and price-sensitive, which
leads to significant buyer power.
• Brands that excel in customer service and providing exceptional
experiences, such as Nordstrom, can command premium prices and build
brand loyalty.
4. Threat of Substitution
Threat of Substitution
• The Threat of Substitution refers to the likelihood that customers might
switch to a different product or service.
• When substitution threats are high, businesses are vulnerable to sudden
shifts in consumer preferences.
• One notable example of the threat of substitution occurs in the beverage
industry.
• Consumers can choose from many beverages including
carbonated soft drinks, bottled water, juices, energy drinks,
coffee, tea and alcoholic beverages.
• That’s why beverage companies must explore niche markets,
introduce limited-edition flavors and change their packaging to
differentiate themselves.
4. Threat of Substitution
• The retail industry faces an ongoing threat from e-
commerce and online marketplaces.
• Companies such as eBay and Etsy provide alternative
options for quality and affordable products, so
traditional retailers must continually innovate to
remain relevant.
5. Threat of New Entrants
• How easy is it for new competitors to enter the market and
threaten existing players?
• Threat of New Entrants involves evaluating the barriers to
entry in an industry.
• High barriers, such as high starting capital costs and a small pool
of suppliers, can deter new rivals from early success.
• For example, an established company with significant resources
can lower prices to maintain a competitive edge over new
entrants.
• However, new competitors can easily weaken your business’s
position and quickly disrupt the status quo.
5. Threat of New Entrants
• It’s easy to set up an online store, which means there’s
a lower barrier to entry in the retail sector.
• Platforms such as Shopify allow new small businesses to
attract customers and establish themselves quickly.
• However, the cost of competing with established giants
in terms of marketing and logistics makes it difficult to
dominate the market.
Advantages of Porter's Five
Forces
Porter’s Five Forces is an indispensable resource for
businesses seeking sustainable growth and competitive
advantage. Here are some of its key benefits:
• Holistic Analysis:
• Porter’s Five Forces provides a comprehensive overview
of the competitive landscape. As a result, organizations
can allocate their resources and make decisions based
on multiple factors existing in the environment.
Advantages of Porter's Five
Forces
• Strategic Insight: The model lets businesses think
critically about their position in their industry and their
existing competitors. That way, they can make informed
decisions.
• Risk Mitigation: By identifying potential threats,
companies can address challenges ahead of time. For
example, it offers a unique value proposition to remain
relevant for consumers.
Advantages of Porter's Five
Forces
• Opportunity Identification: Recognizing industry
gaps and unmet needs can help businesses
differentiate themselves or develop innovative
solutions.
• Long-Term Sustainability: When strategies consider
Porter’s Five Forces, they are more likely to withstand
market fluctuations.
Disadvantages of Porter's Five
Forces
• Oversimplification: The model oversimplifies complex
market dynamics and fails to evaluate “why” some
observations occur. As a result, it can be easy to miss
subtle nuances.
• Inaccurate Strategic Analysis: The framework needs to
account for the dynamic nature of industries and
markets. They may evaluate their competition on broad
or narrow terms while failing to consider shifting
boundaries.
Advantages of Porter's Five
Forces
• Backward-Looking: Porter’s Five Forces provides an
overview of an industry based on the past, which makes
it ideal for short-term analysis. However, factors
including globalization and rapid technological
advancements can make its analysis inaccurate.
• Need To Understand the Purpose of Porter’s Five Forces
Framework: Porter’s Five Forces can help you analyze an
industry to create a business strategy. It is not used to
analyze an individual company or determine whether an
industry is attractive.
