Porter’s Five Forces

of Competitive
Analysis
Porter’s Five Forces of Competitive
Analysis
 Introduction
 Porter’s Five Forces Chart
 Porter’s Five Forces
 Porter's Five Forces Evaluation
 Importance of Porter’s Five Forces
 Using The Tools
 Navigating The Model Development: Before, During and After
 Limitations
 Introduction
• The Five Forces Model was developed by Michael E. Porter to help companies
assess the nature of an industry’s competitiveness and develop corporate
strategies accordingly.

• The strength of the five forces will determine the level of profit within an industry
that a competitor can expect to make

• Through his model, Porter classifies five main competitive forces that affect any
market and all industries. It is these forces that determine how much competition
will exist in a market and consequently the profitability and attractiveness of this
market for a company. Through sound corporate strategies, a company will aim to
shape these forces to its advantage to strengthen the organizations position in the
industry.
• Cont…
 Introduction
• This model aimed to provide a new way to use effective strategy to identify, analyze
and manage external factors in an organization’s environment.

• Porter’s five forces model is an analysis tool that uses five industry
forces to
determine the intensity of competition in an industry and its profitability level.

• An attractive market place does not mean that all companies will enjoy similar
success levels. Rather, the unique selling propositions, strategies and processes
will put one company over the other.

• The Five Forces were Porter’s conclusions on the reasons for differing levels of
competition, and hence profitability, in differing industries. They are empirically
derived, i.e. by observation of real companies in real markets, rather than the result
of economic analysis.
Threat of New Entry Competitive Rivalry
- Time and cost of entry - Number of competitors
- Specialist knowledge Threat of - Quality difference
- Economics of Scale New - Other difference
- Cost advantage - Switching costs
Entrants - Customer loyalty
- Technology protection
- Barriers to entry

Bargaining Competitive Bargaining

Power of Rivalry Power of
Suppliers within an Customer
Industry s
Supplier Power
- Number of suppliers
- Size of suppliers
- Uniqueness of service Buyer Power
- Number of customers
- Your ability to substitute
- Size of each orders
- Cost of changing
- Differences between
Threat of competitors
Threat of Substitute Substitutes - Price sensitivity
- Substitute performance - Ability to substitute
- Cost of change - Cost of changing
 Competitive Rivalry within an
Industry
• This force is the major determinant on how competitive and profitable
an industry is. In competitive industry, firms have to compete
aggressively for a market share, which results in low profits. Rivalry
among competitors is intense when:

- There are many competitors

- Exit barriers are high
- Industry growth is slow or negative
- Products are not differentiated and can be easily substituted
- Competitors are of equal size
- Low customer loyalty
Competitive Rivalry within an Industry - Example

McDonald’s faces tough competition because the fast food restaurant market is already saturated.
This element of the Five Forces analysis tackles the effect of competing firms in the industry
environment. In McDonald’s case, the strong force of competitive rivalry is based on the following
external factors:

High number of firms (strong force)

High aggressiveness of firms (strong force)
Low switching costs (strong force)

The fast food restaurant industry has

many firms of various sizes, such as global
chains like
McDonald’s, KFC and local fast food restaurants and road side stops (vada pav) . Also, most medium
and large firms aggressively market their products. In addition, McDonald’s customers experience
low switching costs, which means that they can easily transfer to other restaurants. Thus, this
element of the Five Forces analysis of McDonald’s shows that competition is among the most
Bargaining Power of Suppliers
• Strong bargaining power allows suppliers to sell higher priced or low
quality raw materials to their buyers. This directly affects the buying
firms’ profits because it has to pay more for materials. Suppliers have
strong bargaining power when:

- There are few suppliers but many buyers

- Suppliers are large and threaten to forward integrate
- Few substitute raw materials exist
- Suppliers hold scarce resources
- Cost of switching raw materials is especially high.
Example of Suppliers also influence the competiveness of an industry
• The bargaining power of Toyota’s supplier is Weak

• Toyota has many suppliers in its automotive manufacturing sector. Resources like
metal, raw materials, leather, plastic, computers, cooling system, electrical system,
breaking system and fuel supply system are all bought from hundreds of different
suppliers and different bargaining prices distributed across the globe.

• One of the competitive advantages of Toyota is its strong relationship with the
suppliers and its efficient manner of monitoring supply chain places low
bargaining power on the suppliers.

• In addition most vehicle manufactures own many interchangeable suppliers, and

also have the ability to produce the components by their own in the short time.
Thus, the suppliers do not own the power to change the price.
Bargaining Power of Buyer
• Customers have the power to demand lower price or higher product
quality from industry producers when their bargaining power is strong.
Lower price means lower revenues for the producer, while higher quality
products usually raise production costs. Both scenarios result in lower
profits for producers. Customers exert strong bargaining power when:

- Buying in large quantities or control many access points to the final

customer
- Only few customers exist
- Switching costs to other supplier are low
- They threaten to backward integrate
- There are many substitutes
- Customers are price sensitive
Example of Bargaining power of Buyer
Depends on the marketing channel used for Coca-Cola

1. Super Markets
2. Convenience Stores
3. Soda Shop
4. Vending Machine
5. Restaurant and Food stores

Bargaining power of buyer is high for fountain supermarkets and mass

merchandising because of the low profitability and strong negotiation
power of retail channels but for vending machine bargaining power is
non-existing caused by high profitability.
Threat of New Entrants
• This force determines how easy (or not) it is to enter a particular
industry. If an industry is profitable and there are few barriers to enter,
rivalry soon intensifies. When more organizations compete for the same
market share, profits start to fall. It is essential for existing organizations
to create high barriers to enter to deter new entrants. Threat of new
entrants is high when:
- Low amount of capital is required to enter a market
- Existing companies can do little to retaliate
- Existing firms do not possess patents, trademarks or do not
have established brand reputation
- There is no government regulation
- There is low customer loyalty
- Products are nearly identical
- Economies of scale can be easily achieved
Example of Threat of New Entrant – Entry of Reliance
JIO Telecommunications
1. Jio has grown at a scorching pace:-the network, which has been adding 1-
1.2 million subscribers a day, will likely have 25 million 4G customers.
2. Jio has set off a fierce mobile tariff war in the country:
3. Jio is hurting the balance sheets of other telecom companies: Airtel saw a
4.9% decline in its Q2 profit following the operator slashing data tariffs.
4. Jio is forcing the other players to join forces:-Vodafone and Idea Merger
5. Jio could impact the online content market in India:-The Jio suite offers
more than 300 live streaming TV channels and hundreds of music albums
and movies. This forces other incumbents to up their game in the online
video streaming space.
 Threat of Substitutes

• This force is especially threatening when buyers can easily find substitute
products with attractive prices or better quality and when buyers can switch
from one product or service to another with little cost. For example, to switch
from coffee to tea doesn’t cost anything, unlike switching from car to bicycle.

• Determining Factors :-
 First, if the consumer’s switching costs are low
 Second, if the substitute product is cheaper than the industry’s product
 Third, if the substitute product is of equal or superior quality compared to the
industry’s product, the threat of substitutes is high
 Fourth, if the functions, attributes, or performance of the substitute product are
equal or superior to the industry’s product
 Example of Threat of substitutes
• EXAMPLE – THE AIRLINE INDUSTRY
• From the point of view of airlines themselves, the flying business is very competitive.
There are hundreds of airlines all trying to get a bigger piece of the pie.
• Depending on the nature of the airline’s business, the threat of substitutes can range
from lower on the scale to mid-range.
• For domestic or regional airlines or routes, there is always the option of taking a car,
bus or train. It may take longer but often this consideration is outweighed by the cost
advantages of substitute methods
• There is also no switching cost to deal with.
• In the case of international airlines, the threat of substitutes is almost non-existent
• On longer routes, a traveler needs to take a flight with no possible alternates
• Threat here is from competitors who may offer better rewards, better prices or a
better
flying experience
 Porter's Five Forces Of Auto Industry – Passenger Car
 Competitive Rivalry - (High)

 Competitive rivalry has increased post liberalization to a great extent

 The automotive industry is majorly commanded by domestic player, with
an immense market share in the country during FY 15-16

• The competition has turned more intense after the entry of foreign players
like Volkswagen and Ford in low- priced hatchback segment
• Foreign firms have aggravated the competition by changing their traditional
designs and substituting it to cater Indian needs
 Porter's Five Forces Of Auto Industry
 Threat of New Entrants - low
 Economies of Scale and Capital requirement
 Brand identity, Product Differentiation and Customer
Switching Costs
 Other factors like access to raw material, technology and
distribution channel
 Government policies and protection for the sector
– 100 % FDI in the automotive industry
 Porter's Five Forces Of Auto Industry
 Substitute Products - (High)
 Scenario of Indian Travel Industry
– Rail & Air Travel – 10%
– Road Travel -90%
– Two Wheleer – 72%
– Passenger Vehicle (Cars, Jeeps & Taxi’s) – 14%
– Public Transport Buses & Non Passenger Vehicle – 14%
 Availability of close subsititue
 Switching Cost
 Substitute price and value
 Porter's Five Forces Of Auto Industry
Bargaining Power of Suppliers - (Low)
• Number of Supplier:
– More than 500 auto component manufacturers in the organized
sector represented by ACMA (Automotive Components
Manufacturer's Association of India)
– 5000 manufacturers in the unorganized sector
• Import from Nations with Free Trade Agreement & Low
Import Duties
– Japan, South Korea, Thailand, China, Malaysia & South Africa
 Porter's Five Forces Of Auto Industry
 Bargaining Power of Buyer- (High)
 Number of Potential Buyer – Huge
 Changing Preferences, Income Graph
 Low switching Cost
– Very Few Established Players
– Brand Loyalty is low
– Launch of New Models every Year
 Industry Attractiveness of Auto Industry – Low
Force Threat to Profit
(Present)

Internal Rivalry High High. Will rise

Threat to Entry Low Moderate

Substitutes High High

Bargaining Power of Buyer High High, Will rise

Bargaining Power of Supplier Low Moderate

Importance of The Porter’s Five Forces

Measure and
Monitor strategy
Strategies effectiveness
- Competitive advantage
- Cost advantage
- Marketing dominance
- New product
development
Industry Analysis - Contraction /
- Industry relevance Diversification
- Industry players - Price leadership
Basic Knowledge of - Industry structure - Global
Business Strategy - Future changes - Re-engineering
& that influence - Downsizing
the design making - Restructuring
What
Strategy to How to Deal with Competition
Use ?
Using The Tools
• We now understand that Porter’s five forces framework is used
to analyze industry’s competitive forces and to shape
organization’s strategy according to the results of the analysis.
But how to use this tool? We have identified the following
steps:

• Step 1. Gather the information on each of the five forces

• Step 2. Analyze the results and display them on a diagram
• Step 3. Formulate strategies based on the conclusions
 Generic strategies
This model, developed by Porter, examines the different ways that an organisation can achieve a
competitive advantage in its market.

Porter argued that businesses could adopt one of three strategies to gain competitive advantage.

Each business can adopt the strategy that best fits their individual circumstances.

Cost leadership: This involves the business making a product of similar quality to its rivals, but at
a lower cost. This is normally achieved through internal efficiencies.

Differentiation: This strategy involves persuading customers that our product is superior to that
of our rivals. It can be done by adding additional features to the product or by
altering customer perception of the product through advertising or branding.
Differentiation will usually allow the business to charge a premium price for its
product.

Focus:This involves aiming at a segment of the market, rather than the market as a
whole. A particular group of consumers is identified with the same needs and
the business will provide products or services that are tailored to their needs.
This tailored approach will typically allow the business to charge a premium for
their products.