• The five forces are environmental forces
that impact on a company’s ability to
compete in a given market.
• The purpose of five-forces analysis is to
diagnose the principal competitive
pressures in a market and assess how
strong and important each one is.
Porter’s Five Forces
Model of Competition
Threat of
Threat
of New
New
Entrants
Entrants
Threat of New Entrants
Economies of Scale
Barriers to
Entry
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent of Scale
Government Policy
Expected Retaliation
Porter’s Five Forces
Model of Competition
Threat of
Threat
of New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
Bargaining Power of Suppliers
Suppliers are likely to be powerful if:
Supplier industry is dominated by a few firms
Suppliers exert power
in the industry by:
* Threatening to raise
prices or to reduce quality
Powerful suppliers
can squeeze industry
profitability if firms
are unable to recover
cost increases
Suppliers’ products have few substitutes
Buyer is not an important customer to supplier
Suppliers’ product is an important input to
buyers’ product
Suppliers’ products are differentiated
Suppliers’ products have high switching costs
Porter’s Five Forces
Model of Competition
Threat of
Threat
of New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
Bargaining
Power of Buyers
Bargaining Power of Buyers
Buyer groups are likely to be powerful if:
Buyers are concentrated or purchases are large
relative to seller’s sales
Buyers compete with the
supplying industry by:
Purchase accounts for a significant fraction of
supplier’s sales
Products are undifferentiated
Buyers face few switching costs
Buyers’ industry earns low profits
Product unimportant to quality
Buyer has full information
* Bargaining down prices
* Forcing higher quality
* Playing firms off of
each
other
Porter’s Five Forces
Model of Competition
Threat of
Threat
of New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
Bargaining
Power of Buyers
Threat of
Substitute
Products
Threat of Substitute Products
Keys to evaluate substitute products:
Products with
similar function
limit the prices
firms can charge
Products with improving price/performance
tradeoffs relative to present industry
products
Example:
Electronic security systems in place of
security guards
Fax machines in place of overnight mail
delivery
Porter’s Five Forces
Model of Competition
Threat of
Threat
of New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
Rivalry Among Competing
Firms in Industry
Threat of
Substitute
Products
Bargaining
Power of Buyers
Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:
Jockeying for strategic position
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
Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when:
Numerous or equally balanced competitors
Slow growth industry
High fixed costs
High storage costs
Lack of differentiation or switching costs
Capacity added in large increments
Diverse competitors
High strategic stakes
High exit barriers
The Five Forces are Unique to
Your Industry
• Five-Forces Analysis is a framework for
analyzing a particular industry.
– Yet, the five forces affect all the other
businesses in that industry.
(b) Porter’s Five Forces
Bargaining Power of Customers
Ryanair customers are highly price sensitive. It is very easy to change their airline and it is
not related to high cost. In this century customer’s knowledge about the cost of service is
high and there is no customer loyalty for Ryanair. Even though there is no customer
loyalty, bargaining power of customers is low. Ryanair is the cheapest airline for all
Europe destinations and customers are –especially in recession times- highly price
sensitive.
New Entrants
It is very hard to be new in airline industry. There are lots of barriers to entry. You should
take the flight authorizations. The capital that you will invest in this sector is very high. It
is also hard to take a place current competition and also hard to find suitable airports for
your flights. In my opinion in short time period there will not be any threats of new
entrants against Ryanair even though some existing companies are changing their
strategy and reducing their ticket price (Lufthansa).
(b) Porter’s Five Forces
Threat of Substitutes
As I mentioned before there is not any brand loyalty of customers and Ryanair preferred
customer relationship is “not-close relationship”. If their customers find better way to
travel they will not feel any hesitation to chose it. So the threat of direct and indirect
substitutes is very high and the most important point is there are no switching costs for
the customers.
Competitive Rivalry
The market is highly competitive. Most of Ryanair’s cost advantages can be copied
immediately. In Europe it seems like there is an agreement between Ryanair and Easyjet
about not to compete head to head. However if any company does decide to compete
on the same basis as Ryanair it will be highly crucial for Ryanair. There will be heavy
pressure on prices, margins, and hence on profitability
Competitor Analysis
The follow-up to Industry Analysis is
effective analysis of a firm’s Competitors
Industry Environment
Competitive
Environment
Competitor Analysis
Assumptions
What assumptions do our competitors hold
about the future of industry & themselves?
Response
What will our competitors do
in the future?
Current Strategy
Does our current strategy support changes in
the competitive environment?
Where do we have a
competitive advantage?
Future Objectives
How do our goals compare to our
competitors’ goals?
Capabilities
How do our capabilities compare to our
competitors?
How will this change our
relationship with our
competition?
Competitor Analysis
Future Objectives
How do our goals compare
to our competitors’ goals?
Where will emphasis be
placed in the future?
What is the attitude
toward risk?
What Drives the competitor?
Competitor Analysis
Future Objectives
How do our goals compare
to our competitors’ goals?
Current
Strategy
Where will
emphasis
be
placed inHow
the future?
are we currently
What is the
attitude
competing?
toward risk?
Does this strategy support
changes in the
competitive structure?
What is the competitor doing?
What can the competitor do?
Competitor Analysis
Future Objectives
What does the competitor believe about itself
and the industry?
How do our goals compare
to our competitors’ goals?
Where will
emphasisStrategy
be
Current
placed in the future?
How are we currently
What is the
attitude
competing?
Assumptions
toward risk?
Does thisDo
strategy
support
we assume
the future
changes in
willthe
be volatile?
competition
structure?
What
assumptions do our
competitors hold about the
industry and themselves?
Are we assuming stable
competitive conditions?
Competitor Analysis
Future Objectives
What are the competitor’s
capabilities?
How do our goals compare
to our competitors’ goals?
Where will
emphasisStrategy
be
Current
placed in the future?
How are we currently
What is the
attitude
competing?
Assumptions
toward risk?
Does this
support
Dostrategy
we assume
the future
changeswill
in the
be volatile?
competition
Whatstructure?
assumptions do our
competitors
hold about the
Capabilities
industry and themselves?
What are my competitors’
Are we operating under a
strengths and weaknesses?
status quo?
How do our capabilities
compare to our
competitors?
Competitor Analysis
Response
Future Objectives
How do our goals compare
to our competitors’ goals?
Where will
emphasisStrategy
be
Current
placed in the future?
How are we currently
What is the
attitude
competing?
Assumptions
toward risk?
Does this
support
Dostrategy
we assume
the future
changeswill
in the
be volatile?
competition
Whatstructure?
assumptions do our
Capabilities
competitors
hold about the
industry and themselves?
What are my competitors’
Are we operating
a
strengthsunder
and weaknesses?
status quo?
How do our capabilities
compare to our
competitors?
What will our competitors
do in the future?
Where do we have a
competitive advantage?
How will this change our
relationship with our
competition?