Five Competitive Forces
(Porter)

Outside-in Business Strategy. Explanation of Five Competitive Forces of Michael Porter.

What is the Five Forces model of Porter? Description

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. The Competitive Forces analysis is made by the identification of 5 fundamental competitive forces:

1. Entry of competitors. How easy or difficult is it for new entrants to start competing, which barriers do exist.
2. Threat of substitutes. How easy can a product or service be substituted, especially made cheaper.
3. Bargaining power of buyers. How strong is the position of buyers. Can they work together in ordering large volumes.
4. Bargaining power of suppliers. How strong is the position of sellers. Do many potential suppliers exist or only few potential suppliers, monopoly?
5. Rivalry among the existing players. Does a strong competition between the existing players exist? Is one player very dominant or are all equal in strength and size.

Sometimes a sixth competitive force is added:

6. Government.

Porter's Competitive Forces model is probably one of the most often used business strategy tools. It has proven its usefulness on numerous occasions. Porter's model is particularly strong in thinking Outside-in.

Threat of New Entrants depends on:

• Economies of scale.
• Capital / investment requirements.
• Customer switching costs.
• Access to industry distribution channels.
• Access to technology.
• Brand loyalty. Are customers loyal?
• The likelihood of retaliation from existing industry players.
• Government regulations. Can new entrants get subsidies?

Threat of Substitutes depends on:

• Quality. Is a substitute better?
• Buyers' willingness to substitute.
• The relative price and performance of substitutes.
• The costs of switching to substitutes. Is it easy to change to another product?

Bargaining Power of Suppliers depends on:

• Concentration of suppliers. Are there many buyers and few dominant suppliers? Compare: Kraljic Model.
• Branding. Is the brand of the supplier strong?
• Profitability of suppliers. Are suppliers forced to raise prices?
• Suppliers threaten to integrate forward into the industry (for example: brand manufacturers threatening to set up their own retail outlets).
• Buyers do not threaten to integrate backwards into supply.
• Role of quality and service.
• The industry is not a key customer group to the suppliers.
• Switching costs. Is it easy for suppliers to find new customers?

Bargaining Power of Buyers depends on:

• Concentration of buyers. Are there a few dominant buyers and many sellers in the industry?
• Differentiation. Are products standardized?
• Profitability of buyers. Are buyers forced to be tough?
• Role of quality and service.
• Threat of backward and forward integration into the industry.
• Switching costs. Is it easy for buyers to switch their supplier?

Intensity of Rivalry depends on:

• The structure of competition. Rivalry will be more intense if there are lots of small or equally sized competitors; rivalry will be less if an industry has a clear market leader.
• The structure of industry costs. Industries with high fixed costs encourage competitors to manufacture at full capacity by cutting prices if needed.
• Degree of product differentiation. Industries where products are commodities (e.g. steel, coal) typically have greater rivalry.
• Switching costs. Rivalry is reduced when buyers have high switching costs.
• Strategic objectives. If competitors pursue aggressive growth strategies, rivalry will be more intense. If competitors are merely "milking" profits in a mature industry, the degree of rivalry is typically low.
• Exit barriers. When barriers to leaving an industry are high, competitors tend to exhibit greater rivalry.

Strengths of the Five Competitive Forces Model. Benefits

• The model is a strong tool for competitive analysis at industry level. Compare: PEST Analysis
• It provides useful input for performing a SWOT Analysis.

Limitation of Porter's Five Forces model

• Care should be taken when using this model for the following: do not underestimate or underemphasize the importance of the (existing) strengths of the organization (Inside-out strategy). See: Core Competence
• The model was designed for analyzing individual business strategies. It does not cope with synergies and interdependencies within the portfolio of large corporations. See: Parenting Advantage
• From a more theoretical perspective, the model does not address the possibility that an industry could be attractive because certain companies are in it.
• Some people claim that environments which are characterized by rapid, systemic and radical change require more flexible, dynamic or emergent approaches to strategy formulation. See: Disruptive Innovation
• Sometimes it may be possible to create completely new markets instead of selecting from existing ones. See: Blue Ocean Strategy

Overview of the Book "Competitive Strategy"

• In Part I, Porter discusses the structural analysis of industries (with the five forces), the three generic competitive strategies (overall Cost Leadership, Focus, and Differentiation), offering an excellent framework for competitor analysis, competitive moves, strategy toward buyers and suppliers, structural analysis within industries (strategic groups, strategic mapping, mobility barriers), and industry evolution (life cycle, evolutionary processes).
• In Part II, Porter discusses competitive strategy within various generic industry environments. Such as: fragmented industries (with no real market leader), emerging industries, mature industries, declining industries, and global industries.
• In Part III, Porter discusses strategic decisions which businesses/firms can take. Such as: vertical integration (forward, backward, partnerships), capacity expansion, and entry into new industries/businesses.

Book: Michael E. Porter - Competitive Strategy -

Five Forces Forum

Anuj - Ireland

Good for start up

"This model or tool is helpful for analysing and making a strategy for those company those who are new and in growing phase but a mature company should look beyond these five forces to analyse or sustain in this highly competitive environment."

7

Jan Demacker - Netherlands

It's a tool

"Ladies and gentlemen. IT IS A TOOL, nothing more. And just like ANY tool, it is as good or bad as the person using it. The explanation above is alright. People do get the general idea of Porter's Model. (I needed to refresh as marketing isn't my thing and I do prefer this explanation over my university's)"

13

Faraday - Netherlands

5 Forces in the public sector

"The profitability (such as more students & diploma's) in the education sector is becoming increasingly a predicament for the public sector. It would be therefore a challenge to interpret and apply the 5 forces model for the public sector."

22

Kudzai Nyangoni - S. Africa

Porter's 5 Forces Model

"Michael Porter's 5 Forces Model is about the best model I know that provides a comprehensive basis for analysing elements that affect a business. If used carefully with other methodologies such as SWOT Analysis, PESTELG, BCG matrix, Core competency analysis, etc, one is able to craft a competitive and sustainable business strategy. Remember a good strategy is as good as the credibility of the information used and how well these methodologies are applied. "

5

SanjaKHamilton - Canada

5 forces and supplier marketing

"The 5 forces model doesn't take in to account supplier's marketing strategy especially investement in to advertizing and branding which can certainly sway supplier's power away and create a brand new environment. Otherwise it's a good model...."

22

Jane - US

Assumptions

"The Five Forces model has two basic premises. The first is that the goal of a business is long-term profitability. The second is that the intensity of competition in an industry is neither a matter of coincidence or bad luck. Competition is rooted in an industry's economic structure."

56

Radhi - Zimbabwe

Porter's 5 Forces

"This article was well written. I find it helpful for my MBA studies and exams"

32

Jay - US

Industry Analysis model

"Another name for the Five Forces model by Porter is: Industry Analysis model."

21

Namathanga - Malawi

5 Forces Mode

"I find it quite challenging but beneficial to apply the model to a public institution in my dissertation for Msc in Strategic Management"

20

Richard - Ghana

Generic competitive forces

"Small businesses in Ghana are constantly battling these forces, yet most of their owners have little knowledge on how to deal with them. It would be great if we could explain these forces to some small business owners."

17

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