Porters Five Forces

PORTER’S FIVE FORCES
 Porter’s Five Forces analysis is a framework that helps analysing the

level of competition within a certain industry.
 Porter's Five Forces is a framework that analyzes the competitive
environment within an industry. It helps companies understand the
five key forces that shape competition and profitability.
 It is especially useful when starting a new business or when entering
a new industry sector. According to this framework, competitiveness
does not only come from competitors.
 Rather, the state of competition in an industry depends on five basic
forces: threat of new entrants, bargaining power of suppliers,
bargaining power of buyers, threat of substitute products or services,
and existing industry rivalry.
 The collective strength of these forces determines the profit
potential of an industry and thus its attractiveness
Rivalry among existing competitors
 This examines how intense the current competition is in the

marketplace, which is determined by the number of existing
competitors and what each competitor is capable of doing.
 Rivalry is high when there are a lot of competitors that are

roughly equal in size and power.
 When rivalry is high, competitors are likely to actively engage

in advertising and price wars, which can hurt a business’s
bottom line.
 In addition, rivalry will be more intense when barriers to exit

are high, forcing companies to remain in the industry even
though profit margins are declining.
Threat of new entrants
New entrants in an industry bring new capacity and
the desire to gain market share.
 The seriousness of the threat depends on the
barriers to enter a certain industry.
 The higher these barriers to entry, the smaller the
threat for existing players.
Examples of barriers to entry are the need for
economies of scale, high customer loyalty for
existing brands, large capital requirements (e.g.
large investments in marketing or R&D), the need
for cumulative experience, government policies, and
limited access to distribution channels
Threat of substitute products
 The existence of products outside of the realm of the common
product boundaries increases the propensity of customers to
switch to alternatives.
 In order to discover these alternatives one should look beyond
similar products that are branded differently by competitors.
 Instead, every product that serves a similar need for customers
should be taken into account. Energy drink like Redbull for
instance is usually not considered a competitor of coffee brands
such as Nespresso or Starbucks.
 However, since both coffee and energy drink fulfill a similar
need (i.e. staying awake/getting energy), customers might be
willing to switch from one to another if they feel that prices
increase too much in either coffee or energy drinks.
 This will ultimately affect an industry’s profitability and should
therefore also be taken into account when evaluating the
industry’s attractiveness.
Bargaining power of suppliers
 This force analyzes how much power and control a

company’s supplier (also known as the market of inputs)
has over the potential to raise its prices or to reduce the
quality of purchased goods or services, which in turn
would lower an industry’s profitability potential.
 The concentration of suppliers and the availability of
substitute suppliers are important factors in determining
supplier power.
 The fewer there are, the more power they have.
Businesses are in a better position when there are a
multitude of suppliers.
 Sources of supplier power also include the switching
costs of companies in the industry, the presence of
available substitutes, the strength of their distribution
channels and the uniqueness or level of differentiation in
the product or service the supplier is delivering.
Bargaining power of buyers
• The bargaining power of buyers is also described as the market of

outputs. This force analyzes to what extent the customers are able
to put the company under pressure, which also affects the
customer’s sensitivity to price changes.
• The customers have a lot of power when there aren’t many of them
and when the customers have many alternatives to buy from.
• Moreover, it should be easy for them to switch from one company
to another. Buying power is low however when customers purchase
products in small amounts, act independently and when the
seller’s product is very different from any of its competitors.
• The internet has allowed customers to become more informed and
therefore more empowered. Customers can easily compare prices
online, get information about a wide variety of products and get
access to offers from other companies instantly.
• Companies can take measures to reduce buyer power by for
example implementing loyalty programs or by differentiating their
products and services.

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PORTER’S FIVE FORCES

 Porter’s Five Forces analysis is a framework that helps analysing the

 This examines how intense the current competition is in the

 Rivalry is high when there are a lot of competitors that are

 When rivalry is high, competitors are likely to actively engage

 In addition, rivalry will be more intense when barriers to exit

 This force analyzes how much power and control a

• The bargaining power of buyers is also described as the market of

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