Five Force Analysis
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
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Porter 5 Forces Analysis
An excellent framework that could help managers,
entrepreneurs and investors
• Evaluate whether a business is operating in a
profitable industry.
• Helps to oppose a competitive environment
( environment audit = environment invistigation)
focus on the business not specific product.
Porter’s model deals with the strategy towards the
opportunities and threats in the organizations external
environment (especially competitive strategy ).
Porter´s Model
 Porter has identified five competitive forces that
shape every industry and every market. These
forces determine the intensity of competition and
hence the profitability .
 From the results of Porter´s model analysis,
strategies could be formulated to help companies
identify opportunities and avoid threats.
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Porter’s five forces model
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Porter’s five forces model
Each force in this framework could be categorized as :
– Strong
Strong forces are perceived as threats to the enterprise.
Strong forces have strong bargaining power thus limit
the enterprise’s ability to increase price or lower cost.
– Medium
– Weak
Weak forces are perceived as opportunities. Weak
forces have low bargaining power thus the enterprise
could increase price or lower cost to sustain more profit.
PORTE´S MODEL
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
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Threat of Entry
New competitor could change major determinants
of the market environment (e.g. prices, customer
loyalty).
Always a latent pressure for reaction and
adjustment for existing players in the market.
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Threat of entry
• Economies of scale e.g. the benefits associated
with bulk purchasing.
• The high or low costs of entry e.g. how much will it
cost for the latest technology?
• How long does it take for new staff to acquire the
necessary skills to do the work?
• How loyal are the end users in this industry?
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Threat of entry
• Ease of access to distribution channels e.g.: Do our
competitors have the distribution channels sewn up?
• Will competitors retaliate?
• Government action e.g. will new laws be introduced
that will weaken our competitive position?
• How important is differentiation? E.g. The Champagne
brand cannot be copied.
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Bargaining Power of buyer
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
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Bargaining Power of buyer
Hotel industry
– Especially Users Sensitive to prices.
– Tourists looking for cheaphotels.com
– More hotel competitors within a tourist hotspot,
bargaining power of customer will be higher because
customer able to do comparison
– Hotel will use different type of promotion, prices,
advertisement or other way to attract customer.
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Bargaining Power of buyer
 Buyers has ability to influence the prices and demand
higher quality. Ex: airline industry
 Trigger competition in a competitive environment ( airline
industry).
 This forces airlines to bring down prices in order to
compete which gives the buyers the advantage of enjoying
lower prices and different promotions
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Bargaining Power of buyer
 How large are your buyers’ company?
 How many companies are there for the buyer to choose
from?
 Are the buyers buying a huge volume?
 Do you depend only on a few buyers to sustain your sales?
 How hard is it for the buyers to switch and use a
competing product?
 Are the buyers purchasing from you as well as your
competitors?
 Do the buyers have the capacity to enter your business and
produce the goods themselves?
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Bargaining power of suppliers
The term 'suppliers' comprises all sources for inputs that
are needed in order to provide goods or services e.g. Hotel
industry ( furnishings companies, training service
providers, marketing companies , ..etc)
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Bargaining power of suppliers
• The more powerful a seller is on buyer, more influence the
seller has.
• This influence reduce the profits of the buyer through
more advantageous pricing, limiting quality of the product
or service, or shifting some costs onto the buyer (e.g.
shipping costs).
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Bargaining power of suppliers
 Suppliers are powerful if:
– Suppliers are concentrated or differentiated: If there are only a
few suppliers (or one) in the market, the suppliers will have
more leverage because of the lack of available alternatives.
– Significant costs involved in switching suppliers: Customers are
less likely to switch suppliers if there are large costs associated
with switching.
– Suppliers can forward integrate: If a supplier has the power to or
threatens to forward integrate, the buyer may be forced to accept
influence from the supplier.
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Bargaining power of suppliers
 Are there substitutes for your suppliers’ products?
 Do your suppliers serve multiple industries? Does the total
industry revenue accounting for only a small portion of the
supplier’s total revenue?
 Do you have high switching cost to use another supplier?
 Do suppliers have the capacity to enter your business?
 Does your company capable to enter the supplier’s
business?
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Treath of substitute
A threat from substitutes exists if there are alternative products
with lower prices of better performance parameters for the
same purpose.
They could potentially attract a significant proportion of
market volume and hence reduce the potential sales volume for
existing players.
Ex: Hotel face a threat of substitutes,(cottage and B&B , Inn )
popular and acceptable for consumer (standard service with very
reasonable price)
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Treath of substitute
How many close substitutes are available?
How pricy are the substitutes?
What is the perceived quality of the substitutes?
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Rivality
 This force describes the intensity of competition between
existing players (companies) in an industry.
 High competitive pressure results in pressure on prices,
margins, and hence, on profitability for every single
company in the industry
Rivalry among competitors can lead to an aggressive pricing
and promotion in battles to benefit and attract more customers.
In hotel industry, there is low switching cost for consumer, they
can change hotel anytime so degree rivalry is very high.
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Strategies formulation
 After analyzing each force individually, the next step is to
interrupt the results of this framework as a whole.
 having strong suppliers that are raising their prices, are you able
to shift the cost to your customers? Do you have a weak buyer?
 You can also formulate strategies according to the results to
change your situation. For instance, you can stop buying from
your suppliers. You can also launch your own retailers and sell
your own goods through your own distribution channels.
 Depending on your own situation, try to formulate the right
strategies to increase your bargaining power against the five
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forces.