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PORTER’s FIVE FORCESMODEL
Prof. B.S.Hothi
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INTRODUCTION
• The Five Forces model of Porter is an outside-inbusiness
unit strategy tool that is used to make ananalysis of the
attractiveness (value...) of an industrystructure.
• It captures the key elements of industry competition.
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BuyersSuppliers
Substituteproducts
Potentialentrants
Industry competitors
Rivalry among
existing firms
Threat of
new entrants
Bargaining power
of suppliers
Bargaining power
of buyers
Threat of
substitutes
PORTER’s FIVE FORCES
MODEL
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Threat ofNew
Entrants
Threat ofNew
Entrants
Threat of New
Entrants
Threat of New
Entrants
PORTER’s FIVE FORCES
MODEL
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Threat of New Entrants Threat of New Entrants
Barriers to
Entry
Barriers to
Entry
Government Policy
Expected Retaliation
Economies of Scale
Product Differentiation
Capital Reuirements
Customer Switchin! Costs
"ccess to Distri#ution Channels
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Bar!ainin!
Power of
Suppliers
Bar!ainin!
Power of
Suppliers
Threat ofNew
Entrants
Threat of New
Entrants
Threat of New
Entrants
PORTER’s FIVE FORCES
MODEL
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Barainin Power of S!""#iersBarainin Power of S!""#iers
Suppliers exert
power in the
industry #y$
Suppliers exert
power in the
industry #y$
% Threatening to raise% Threatening to raise
prices or to reducequality
prices or to reducequality
Powerful suppliers
can suee&e
industry
profita#ility if firmsare una#le to
recover cost
increases
Powerful suppliers
can suee&e
industry
profita#ility if firmsare una#le to
recover cost
increases
Suppliers are li'ely to #e powerful if$
Supplier industry is dominated by a fewfirms
Suppliers products have few substitutes
Buyer is not an important customer tosupplier
Suppliers product is an important input tobuyers product
Suppliers products are differentiated
Suppliers products have high switchingcosts
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Bar!ainin!
Power of
Buyers
Bar!ainin!
Power of
Buyers
Threat ofNew
Entrants
Threat of New
Entrants
Threat of New
Entrants
Bar!ainin!
Power of
Suppliers
Bar!ainin!
Power of
Suppliers
PORTER’s FIVE FORCES
MODEL
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Barainin Power of B!$ersBarainin Power of B!$ers
Buyers compete with
the supplyin! industry
#y$
Buyers compete with
the supplyin! industry
#y$
% Bargaining down prices% Bargaining down prices
* Forcing higher quality * Forcing higher quality
* Playing firms off of * Playing firms off of
each other each other
Buyer !roups are li'ely to #e powerful if$
Buyers are concentrated
Purchase accounts for a significant fraction ofsuppliers
sales
Products are undifferentiated
Buyers face few switching costs
Buyer presents a credible threat of bac!ward
integrationBuyer has full information
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Threat of
Su#stitute
Products
Threat of
Su#stitute
Products
Threat of
New
Entrants
Threat of New
Entrants
Threat of NewEntrants
Bar!ainin!
Power of
Buyers
Bar!ainin!
Power of
Buyers
Bar!ainin!
Power of
Suppliers
Bar!ainin!
Power of
Suppliers
PORTER’s FIVE FORCES
MODEL
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Threat of S!%stit!te Pro&!'ts Threat of
S!%stit!te Pro&!'ts
Products withsimilar function limitthe pricesfirms
cancharge
Products withsimilar function limitthe pricesfirms
cancharge
Keys to evaluate substitute products:
Products with improvingprice/performance tradeoffsrelative to
present industry
products
Example:
Electronic security systems in placeof security guards
E-Mail in place of Fax
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Threat of
Su#stitute
Products
Threat of
Su#stitute
Products
Threat ofNew
Entrants
Threat of New
Entrants
Threat of New
Entrants
Rivalry "mon!
Competin! (irms in
)ndustry
Rivalry "mon!
Competin! (irms in
)ndustry
Bar!ainin!
Power of
Buyers
Bar!ainin!
Power of
Buyers
Bar!ainin!
Power of
Suppliers
Bar!ainin!
Power of
Suppliers
PORTER’s FIVE FORCES
MODEL
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Ri(a#r$ )*on E+istin Co*"etitorsRi(a#r$ )*on E+istin
Co*"etitors
)ntense rivalry often plays out in the followin!ways$
*sin! price competition
Sta!in! advertisin! #attles
+a'in! new product introductions
)ncreasin! consumer warranties or service
,ccurs when a firm is pressured or sees an
opportunityPrice competition often leaves the entire industry
worse off
"dvertisin! #attles may increase total industry demand- #ut
may
#e costly to smaller competitors
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Co'a,'o#a
• Traditional competition" Prices of Pepsi# local brands
$ar!et share
Promotional actions of competition
% New entrants" New &loo!'a'li!e( manufacturers
% Substitute products" )ashionable new drin!s# mil! drin!s#
coffee# beer# ***
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Co'a,'o#a
• Suppliers" Price and availability of ingredients on world
mar!et
% Buyers+consumers" High as a result of intense competition both
among
branded and unbranded products.
,ombined purchase power of shops# bars# supermar!ets
S h f - f
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Strenths of -(e for'es*o&e#
The model is strong tool for competitive analysis atindustry
level.
It provides useful input for performing a SWOTanalysis.
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Li*itations• nside-out strategy is ignored !core competence"
• t does not cope with synergies and
interdependencies within the portfolio of large corporations
!parenting
advantage"
• #he environments which are characteri$ed by rapid%systemic and
radical change re&uire more flexible% dynamicor emergent
approaches to strategy formulation !disruptive
innovation"
• 'ometimes it may be possible to create completely newmar(ets
instead of selecting from existing ones !blue ocean
strategy"
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Than!s
