Michael  Porters’s  5  forces  

Brief  summary  •  The  model  originated  from  Michael  E.  Porter's  1980  book  "CompeEEve  Strategy:  Techniques  for  

Analyzing  Industries  and  CompeEtors."  Since  then,  it  has  become  a  frequently  used  tool  for  analyzing  a  company's  industry  structure  and  its  corporate  strategy.    

•  In  his  book,  Porter  idenEfied  five  compeEEve  forces  that  shape  every  single  industry  and  market.  These  forces  help  us  to  analyze  everything  from  the  intensity  of  compeEEon  to  the  profitability  and  aOracEveness  of  an  industry.  Figure  1  shows  the  relaEonship  between  the  different  compeEEve  forces.  

1.  The  threat  of  new  entrants  •  The  easier  it  is  for  new  companies  to  enter  the  industry,  

the  more  cuOhroat  compeEEon  there  will  be.  Factors  that  can  limit  the  threat  of  new  entrants  are  known  as  barriers  to  entry.  Some  examples  include:  

•  ExisEng  loyalty  to  major  brands  •  IncenEves  for  using  a  parEcular  buyer  (such  as  frequent  

shopper  programs)  •  High  fixed  costs  •  Scarcity  of  resources  •  High  costs  of  switching  companies  •  Government  restricEons  or  legislaEon  

2.  Power  of  suppliers  •  This  is  how  much  pressure  suppliers  can  place  on  a  

business.  If  one  supplier  has  a  large  enough  impact  to  affect  a  company's  margins  and  volumes,  then  it  holds  substanEal  power.  Here  are  a  few  reasons  that  suppliers  might  have  power:  

•  There  are  very  few  suppliers  of  a  parEcular  product  •  There  are  no  subsEtutes  •  Switching  to  another  (compeEEve)  product  is  very  costly  •  The  product  is  extremely  important  to  buyers  -­‐  can\'t  do  

without  it  •  The  supplying  industry  has  a  higher  profitability  than  the  

buying  industry  

3.  Power  of  buyers  •  This  is  how  much  pressure  customers  can  place  on  a  

business.  If  one  customer  has  a  large  enough  impact  to  affect  a  company's  margins  and  volumes,  then  the  customer  hold  substanEal  power.  Here  are  a  few  reasons  that  customers  might  have  power:  

•  Small  number  of  buyers  •  Purchases  large  volumes  •  Switching  to  another  (compeEEve)  product  is  simple  •  The  product  is  not  extremely  important  to  buyers;  they  can  

do  without  the  product  for  a  period  of  Eme  •  Customers  are  price  sensiEve  

4.  Availability  of  suppliers  (subsEtutes)  

•  What  is  the  likelihood  that  someone  will  switch  to  a  compeEEve  product  or  service?  If  the  cost  of  switching  is  low,  then  this  poses  a  serious  threat.  Here  are  a  few  factors  that  can  affect  the  threat  of  subsEtutes:  

•  The  main  issue  is  the  similarity  of  subsEtutes.  For  example,  if  the  price  of  coffee  rises  substanEally,  a  coffee  drinker  may  switch  over  to  a  beverage  like  tea.  

•  If  subsEtutes  are  similar,  it  can  be  viewed  in  the  same  light  as  a  new  entrant.  

5.  CompeEEve  rivalry  •  This  describes  the  intensity  of  compeEEon  between  

exisEng  firms  in  an  industry.  Highly  compeEEve  industries  generally  earn  low  returns  because  the  cost  of  compeEEon  is  high.  A  highly  compeEEve  market  might  result  from:  

•  Many  players  of  about  the  same  size;  there  is  no  dominant  firm  

•  LiOle  differenEaEon  between  compeEtors  products  and  services  

•  A  mature  industry  with  very  liOle  growth;  companies  can  only  grow  by  stealing  customers  away  from  compeEtors  

Example  of  the  5  forces  in  industry  Threat  of  New  Entrants/PotenEal  CompeEtors:  Medium  Pressure  Entry  barriers  are  relaEvely  low  for  the  beverage  industry:  there  is  no  consumer  switching  cost  and  zero  capital  requirement.  There  is  an  increasing  amount  of  new  brands  appearing  in  the  market  with  similar  prices  than  Coke  products.  Coca-­‐Cola  is  seen  not  only  as  a  beverage  but  also  as  a  brand.  It  has  held  a  very  significant  market  share  for  a  long  Eme  and  loyal  customers  are  not  very  likely  to  try  a  new  brand.  Threat  of  SubsEtute  Products:  Medium  to  High  pressure  There  are  many  kinds  of  energy  drink  s/soda/juice  products  in  the  market.  Coca-­‐cola  doesn’t  really  have  an  enErely  unique  flavor.  In  a  blind  taste  test,  people  can’t  tell  the  difference  between  Coca-­‐Cola  and  Pepsi.  The  Bargaining  Power  of  Buyers:  Low  pressure  The  individual  buyer  no  pressure  on  Coca-­‐Cola.  Large  retailers,  like  Wal-­‐Mart,  have  bargaining  power  because  of  the  large  order  quanEty,  but  the  bargaining  power  is  lessened  because  of  the  end  consumer  brand  loyalty.  The  Bargaining  Power  of  Suppliers:  Low  pressure  The  main  ingredients  for  soe  drink  include  carbonated  water,  phosphoric  acid,  sweetener,  and  caffeine.  The  suppliers  are  not  concentrated  or  differenEated.  Coca-­‐Cola  is  likely  a  large,  or  the  largest  customer  of  any  of  these  suppliers.  Rivalry  Among  ExisEng  Firms:    High  Pressure  Currently,  the  main  compeEtor  is  Pepsi  which  also  has  a  wide  range  of  beverage  products  under  its  brand.  Both  Coca-­‐Cola  and  Pepsi  are  the  predominant  carbonated  beverages  and  commiOed  heavily  to  sponsoring  outdoor  events  and  acEviEes.  There  are  other  soda  brands  in  the  market  that  become  popular,  like  Dr.  Pepper,  because  of  their  unique  flavors.  These  other  brands  have  failed  to  reach  the  success  that  Pepsi  or  Coke  have  enjoyed.