DECISION MAKING & STEERING

TOPIC: PORTER’S FIVE FORCES MODEL

Group members:
29. LE Nguyet Minh
30. MAI Thi Thu
31. NGHIEM Thanh Hien
I. Theory
1. Who Created the Porter's Five Forces Model?
The tool was created by Harvard Business School professor Michael Porter in 1979, to
analyze an industry's attractiveness and its potential profitability.
2. What Are Porter's Five Forces?
Porter's Five Forces is a model that identifies and analyzes five competitive forces that
shape every industry and helps determine an industry's weaknesses and strengths. Five
Forces analysis is frequently used to identify an industry's structure to determine corporate
strategy. Porter's model can be applied to any segment of the economy to understand the
level of competition within the industry and enhance a company's long-term profitability.
 Benefits of the Five Forces Model:
- Understand the overall picture: the business environment is often diverse and
complex, the market changes every day with the participation of new competitors,
competition from old competitors. Therefore, 5 competitive pressures will help
businesses have the most comprehensive and comprehensive view. A Five Forces
analysis can help companies assess industry attractiveness, how trends will affect
industry competition, which industries a company should compete in and how
companies can position themselves for success.
- Re-evaluate the potential of the business: self-assessment and self-reflection is a
factor that helps businesses find out what are their strengths and where are their
weaknesses. From there, you can think of better strategies, boost your
competitiveness to always be ahead of your competitors.
- Redirecting the pressures: after analyzing the current state of the business based on 5
competitive forces, we can clearly visualize which pressures are beneficial to the
business. From there, timely adjust the strategy in line with competitive pressure on
the organization.
Porter's five forces are:
- Rivalry among existing competitors
- Threat of new entrants
- Threat of substitutes
- Bargaining Power of Buyers
- Bargaining Power of Suppliers.
2.1. Rivalry among existing competitors.

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The first of the five forces refers to the number of competitors and their ability to undercut a
company. The characteristics shown for Competitive Rivalry are: Number of competitors,
Quality differences, other differences, switching costs and customer loyalty, ...
The larger the number of competitors, along with the number of equivalent products and
services they offer, the lesser the power of a company. Suppliers and buyers seek out a
company's competition if they are able to offer a better deal or lower prices. Conversely,
when competitive rivalry is low, a company has greater power to charge higher prices and
set the terms of deals to achieve higher sales and profits.
 The first of Porter's Five Forces looks at the number and strength of your competitors.
How many rivals do you have? Who are they, and how does the quality of their products and
services compare with yours?
2.2. Threat of new entrants.
A company's power is also affected by the force of new entrants into its market. The less
time and money it costs for a competitor to enter a company's market and be an effective
competitor, the more an established company's position could be significantly weakened. An
industry with strong barriers to entry is ideal for existing companies within that industry
since the company would be able to charge higher prices and negotiate better terms.
The characteristics shown for Threat of New Entrants can be mentioned as: Time and cost of
entry, Specialist knowledge, Economies of scale, Cost advantages, Technology protection
and Barriers to entry.
2.3. Bargaining Power of Suppliers.
The next factor in the five forces model addresses how easily suppliers can drive up the cost
of inputs. It is affected by the number of suppliers of key inputs of a good or service, how
unique these inputs are, and how much it would cost a company to switch to another
supplier. The fewer suppliers to an industry, the more a company would depend on a
supplier. As a result, the supplier has more power and can drive up input costs and push for
other advantages in trade. On the other hand, when there are many suppliers or low
switching costs between rival suppliers, a company can keep its input costs lower and
enhance its profits.
The characteristics shown for Supplier Power includes: Number of suppliers, Size of
suppliers, Uniqueness of service, Your ability to substitute and Cost of changing .
2.4. Bargaining Power of Buyers.
The ability that customers have to drive prices lower or their level of power is one of the
five forces. It is affected by how many buyers or customers a company has, how significant
each customer is, and how much it would cost a company to find new customers or markets
for its output. A smaller and more powerful client base means that each customer has more
power to negotiate for lower prices and better deals. A company that has many, smaller,
independent customers will have an easier time charging higher prices to increase
profitability.

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The characteristics shown for Bargaining power of buyers are: Number of customers, Size of
each order, Differences between competitors, Price sensitivity, Ability to substitute and Cost
of changing.
(There may be multiple buyer segments in a given industry with different levels of power)
2.5. Threat of substitution
The last of the five forces focuses on substitutes. Substitute goods or services that can be
used in place of a company's products or services pose a threat. Companies that produce
goods or services for which there are no close substitutes will have more power to increase
prices and lock in favorable terms. When close substitutes are available, customers will have
the option to forgo buying a company's product, and a company's power can be weakened.
The characteristics shown for Threat of subtitution includes: Substitute performance and
Cost of change.
 Understanding Porter's Five Forces and how they apply to an industry, can enable a
company to adjust its business strategy to better use its resources to generate higher
earnings for its investors.
3. Using the Porter’s 5 Forces model
 Gather the information on each of the five forces.
Business owners/ managers should gather information about their industry and check it
against each of the factors influencing the 5 forces.
 Analyse the results and display them on a diagram.
After gathering all the information, you should analyse it and determine how each force is
affecting your business and industry.
 Formulate strategies based on the conclusions.
Business owners/managers should formulate business’ strategies using the results of the
analysis. Porter’s 5 forces is a great tool but has its limitations and requires further analysis
to be done, such as SWOT or PESTLE.
KEY TAKEAWAYS:
After identifying 5 competitive forces, companies must analyze and evaluate the influence of
each factor in the industry on their company: high, relatively high, medium or low level.
From there, researchers will come up with appropriate policies and plans to stand firm in the
market.
Five Forces Model analysis is a strategic tool designed to give a global overview, rather than
a detailed business analysis technique. It helps review the strengthes of a market position,
based on five keys forces. Thus, Five forces works best when looking at an entire market
sector , rather than your own business and a few competitors.
II. Illustrative example for Porter’s Five Forces
Brief overview of Pepsico, Inc.

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Pepsico, Inc. is one of the leading firms in the Beverages - Soft Drinks. Over the years
Pepsico, Inc. has redefined the ways of doing business in Consumer Goods. Pepsico, Inc. is
listed at New York Stock Exchange (NYSE) and have a market cap 167.43B USD.
Porter Five Forces Analysis is a strategic management tool to analyze industry and
understand underlying levers of profitability in a given industry. Pepsico, Inc. managers can
use Porter Five Forces to understand how the five competitive forces influence profitability
and develop a strategy for enhancing Pepsico, Inc. competitive advantage and long term
profitability in Beverages - Soft Drinks industry.
Pepsico, Inc. Porter Five (5) Forces Analysis for Consumer Goods Industry
1. Rivalry among existing competitors (relative high level)
The intensity of competitive rivalry in the beverage – soft drinks industry is relatively high.
The Coca-Cola Company is one of PepsiCo’s biggest competitors. However, this component
of the Five Forces analysis shows that there are other factors that determine the influence of
competitive rivalry. The following are the most notable external factors that create the strong
force of competition against PepsiCo:
- High aggressiveness of firms (strong force)
- Low switching costs (strong force)
- High number of firms (moderate force)
Most firms in the food and beverage industry are aggressive, such as in product innovation
and marketing, thereby exerting a strong force on PepsiCo. Competitive rivalry is also
strengthened because consumers can easily shift from one provider to another (low
switching costs). In addition, PepsiCo competes with many other firms, including big ones
like the Coca-Cola Company and a multitude of small and medium ones. This component of
the Five Forces analysis shows that PepsiCo faces strong competitive rivalry as one of its
most pressing concerns.
How Pepsico, Inc. can tackle Intense Rivalry among the Existing Competitors in
Beverages - Soft Drinks industry
 By building a sustainable differentiation
 By building scale so that it can compete better
 Collaborating with competitors to increase the market size rather than just competing
for small market.
2. Threat of New Entrants (medium level)
PepsiCo must remain strong despite the possibility of new firms competing against it. This
component of the Five Forces analysis covers the influence of new entrants or new firms on
the food and beverage industry environment. The external factors that maintain the moderate
threat of new entry against PepsiCo are as follows:
- Low switching costs (strong force)
- Moderate customer loyalty (moderate force)
- High cost of brand development (weak force)
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New firms threaten PepsiCo because consumers can easily shift from one company to
another (low switching costs). However, through moderate customer loyalty, PepsiCo has a
corresponding level of protection from new entrants. Also, the high cost of brand
development makes it difficult for new entrants to directly compete against PepsiCo, which
has one of the strongest brands in the industry. In this component of the Five Forces
analysis, external factors make the threat of new entrants a secondary concern for PepsiCo’s
management. Since Pepsii is a globally rcognized brand that is consumed in more than 200
countries, the presence of small scale players and new entrants has no significant impact on
the operations of Pepsi. Companies such as Pepsi can benefit from the market dynamics by
using its strong market presence to expand its portfolio and further penetrate into new
markets.
How Pepsico, Inc. can tackle the Threats of New Entrants
 By innovating new products and services. New products not only brings new
customers to the fold but also give old customer a reason to buy Pepsico, Inc. ‘s
products.
 By building economies of scale so that it can lower the fixed cost per unit. 
 Building capacities and spending money on research and development. New entrants
are less likely to enter a dynamic industry where the established players such as
Pepsico, Inc. keep defining the standards regularly. It significantly reduces the
window of extraordinary profits for the new firms thus discourage new players in the
industry.
3. Bargaining Power of suppliers (low level)
PepsiCo must maintain profitable relationships with suppliers. This component of the Five
Forces analysis covers the impact of suppliers on the company’s industry environment. The
weak bargaining power of PepsiCo’s suppliers is based on the following external factors:
- High overall supply (weak force)
- Low forward integration of suppliers (weak force)
- Moderate size of individual suppliers (moderate force)
The suppliers of the beverage industry include firms that supply basic commodities such as
sugar, caffeine, flavors and other ingredients required to manufacture beverages. The
suppliers providing these items have limited control over the price shift and can't exert a
significant influence on the price structure. Since supplier view their contract with large
scale beverage companies such as Pepsi as an important part of their distribution network,
they are not likely to exert much influence or use bargaining power in getting up price of the
ingredients. In addition, the suppliers have to abide by the guiding principles such as
Agriculture Guiding Principles (Journey Staff, 2017), suggestive that they have low
bargaining power and the company has greater influence on supplier contracts and pricing.
4. Bargaining Power of Buyers (medium level)
Consumers are among the top priorities in PepsiCo’s mission statement. The effects of
customers on the firm’s industry environment are determined in this component of the Five

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Forces analysis. The external factors that lead to the strong bargaining power of PepsiCo’s
consumers/buyers are as follows:
- Low switching costs (strong force)
- High access to product information (strong force)
- High availability of substitutes (strong force)
As noted, consumers can easily shift from one firm to another. This condition strengthens
customers’ ability to influence PepsiCo. In addition, consumers have extensive information
for them to easily make choices between PepsiCo products and competing products. Also,
substitutes give buyers even more reasons to stay away from PepsiCo products. Based on
this component of the Five Forces analysis, PepsiCo must ensure customer satisfaction to
maximize its revenues.
The beverage industry comprises corporate buyers as well as individual buyers. Pepsi has
established its market presence through forming favorable ties with its leading corporate
buyers such as fast food chains. In addition, the company has taken advantage of the other
distribution options such as vending machines and convenience stores to expand the reach to
the target market. Based on this background, it can be seen that the buyer power is higher
when it comes to the retail stores and fast food outlets which purchase the beverages in bulk
quantity. On the other hand, individual consumers seem to have limited bargaining power.
Therefore, it can be stated that the bargaining power of buyers is moderate.
5. Threat of Substitutes (relatively high level)
PepsiCo’s products could be substituted, based on consumer preferences and other variables.
The influence of substitution on the firm’s business and industry environment are examined
in this component of the Five Forces analysis. The following external factors contribute to
the strong threat of substitutes against PepsiCo:
- High performance of substitutes (strong force)
- Low switching costs (strong force)
- High availability of substitutes (strong force)
Consumers can select a beverage from the wide range of options available in the market.
There are different companies supplying soft drinks, juices and bottled water which increase
the threat of substitute products. However, consumers that prefer the taste soft drinks
produced by Pepsi are not likely to switch to other beverages. However, the availability of
other brands besides Pepsi affects the industry dynamics as the consumers have the option to
select other beverages. It can be concluded that the threat of substitute products in the
beverage industry is relatively high, thus the switching decisions of the consumers have the
potential to have some effect on the financial performance of Pepsi.
CONCLUSION:
Implications of Porter Five Forces on Pepsico, Inc.
By analyzing all the five competitive forces Pepsico, Inc. strategists can gain a complete
picture of what impacts the profitability of the organization in Beverages - Soft Drinks
industry. They can identify game changing trends early on and can swiftly respond to exploit
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the emerging opportunity. By understanding the Porter Five Forces in great detail Pepsico,
Inc. 's managers can shape those forces in their favor.
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