1. Porter’s Five Forces
A framework for analysing the nature of competition within an industry and potential for profit

2. MICHAEL PORTER
“MANAGEMENT GURU”

3. High Profit Industries
Low Profit Industries

5. INDUSTRY PROFITS Low Profits associated with
High Profits associated with
Strong suppliers
Strong buyers (customers)
Low entry barriers
Many substitutes
Intense rivalry
Weak suppliers
Weak buyers (customers)
High entry barriers
Few substitutes
Little rivalry

6. THREAT OF NEW ENTRANTS Depends on Barriers to Entry including:
Capital Requirements
Economies of Scale available to existing firms
Regulatory & Legal restrictions
Product Differentiation (including Brands)
Access to Suppliers & Distribution Channels
Expertise and know-how
Retaliation by established companies

7. THREAT OF NEW ENTRANTS Depends on Barriers to Entry including:
Capital Requirements
e.g. Airlines (need planes & landing rights)
Economies of Scale available to existing firms
e.g. Coca-cola can produce 2,000 cans per minute
Regulatory & Legal restrictions
e.g. Pharmaceutical industry heavily regulated
Product Differentiation (including Brands)
e.g. new search engine competing against Google
Access to Suppliers & Distribution Channels
e.g. Amazon’s distribution systems & next day delivery
Retaliation by established companies
- e.g. Hoover bagless vacuum cleaner

8. Easy to enter….. (low barriers to entry)

9. Hard to enter ….. (high barriers to entry)

10. BARGAINING POWER OF CUSTOMERS
Depends on:
Number of Customers
Volume of their order sizes
Number of firms supplying the product
Threat of Backward Integration
Cost of Switching

11. BARGAINING POWER OF CUSTOMERS
Depends on:
Number of Customers
Foxconn relies heavily on orders from a few large buyers such as Apple, Nintendo & Sony pushing selling price down
Volume of their order sizes
Number of firms supplying the product
the greater the number of sellers, the more choice available to buyers
Threat of Backward Integration
Some firms face being bought by their customers to secure supply
e.g. Starbucks buying coffee bean farms in China
Cost of Switching
The more homogenous the product, the easier it is to switch giving more power to buyers

12. Bargaining Power of Customer
Higher in the B2B Markets

13. THREAT OF SUBSTITUTES (FROM A DIFFERENT INDUSTRY)
Depends on:
Extent to which Price & Performance of substitute matches industry product
Customer Loyalty
Switching Costs

14. THREAT OF SUBSTITUTES (FROM A DIFFERENT INDUSTRY)
The more choice there is for consumers, the lower profit margins tend to be
Firms have less pricing power
Depends on:
Extent to which Price & Performance of substitute matches industry product
In general, the greater the quality of a firm’s products, the lower the threat from substitutes
Customer Loyalty
Are customers willing to switch brands or do they stick with favourites?
Switching Costs
Are customers tied into contracts? Will their peripheral products be compatible – e.g. Macbook, iPhone – makes it difficult to swap to Android

15. Substitutes for Meal in Indian Restaurant

16. BARGAINING POWER OF SUPPLIERS
Depends on:
Uniqueness of Input supplied
Number and Size of firms supplying resource
Competition for Input from other industries
Cost of Switching to alternative sources

17. BARGAINING POWER OF SUPPLIERS
Directly affects the cost of the items a business buys
Depends on:
Uniqueness of Input supplied
Can firm easily get product from another supplier?
Only Cadbury’s produce Cadbury Dairy Milk
Number and Size of firms supplying resource
If supplier has a monopoly they will have strong bargaining power reducing profit for firm
Competition for Input from other industries
e.g. Corn used for food and as a bio-fuel
Cost of Switching to alternative sources

18. DEGREE OF COMPETITIVE RIVALRY
Depends on:
Number of Competitors in the market
Market Size and Growth prospects
Product Differentiation and Brand Loyalty
Capacity Utilisation
Barriers to Exit

19. DEGREE OF COMPETITIVE RIVALRY
Depends on:
Number of Competitors in the market
Microsoft faces little competition
Rivalry in the supermarkets is intense leading to price wars
Market Size and Growth prospects
Growing markets generally mean less competitive pressure
Shrinking markets make competition more intense
Product Differentiation and Brand Loyalty
The more customers see products as unique, the more price inelastic they are
Capacity Utilisation
Increasing capacity utilisation reduces unit cost enabling lower prices / larger profit margins
Barriers to Exit
How easy is it to get out of a market?
Can a firm afford to lose its sunk costs?

20. Evaluation of Five Forces Model
Should be used at the broader level of whole industry, not smaller market levels
Issue of defining industry
Many companies operate in more than one industry
Static (at a point in time)
Not so good for long term planning
Best combined with other more dynamic models – e.g. PEST
Brainstorming tool
Should be taken in context of broader discussion, not as a stand alone source of recommendation