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Porter's 5 Forces

Porter's Five Forces model analyzes five competitive forces that shape an industry's structure and profitability: the threat of new entrants, the power of buyers, the power of suppliers, the threat of substitutes, and the intensity of rivalry among existing competitors. The stronger each of these forces is, the more limited the ability of established companies to raise prices and earn profits. The model helps assess an industry's attractiveness and potential profitability.

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Reefat Anwar
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41 views8 pages

Porter's 5 Forces

Porter's Five Forces model analyzes five competitive forces that shape an industry's structure and profitability: the threat of new entrants, the power of buyers, the power of suppliers, the threat of substitutes, and the intensity of rivalry among existing competitors. The stronger each of these forces is, the more limited the ability of established companies to raise prices and earn profits. The model helps assess an industry's attractiveness and potential profitability.

Uploaded by

Reefat Anwar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Porter’s Five Forces Model

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2-1
Porter’s Five Forces Model
Risk of Entry by Potential
Competitors
Industry Rivalry
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of Substitutes

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2-2
How the Five
Forces Shape Competition
“…the stronger each of these five forces is, the more
limited is the ability of established companies to raise
prices and earn greater profits.”
Weak competitive force- viewed as an opportunity
as it allows company to earn greater profits
Strong competitive force- viewed as a threat as it
depresses industry profits
Strength of forces may change as industry
conditions change

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2-3
Risk of Entry
by Potential Competitors
“…companies… not currently competing in an industry
but have the capability to do so...” Barriers include:
1. Economies of Scale – unit costs fall
 Cost reductions
 Bulk purchase discounts
 Cost savings
2. Brand Loyalty = creating customer preferences
3. Absolute Cost Advantages v. New Entrants
 Experience, patents, processes
 Control of production inputs
 Lower financial risks
4. Customer Switching Costs
5. Government Regulation
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2-4
Rivalry Among
Established Companies
“…competitive struggle between companies in same
industry to gain market share...” Function of:
 Industry Competitive Structure- Number/size of
companies, consolidated vs. fragmented
 Industry Demand Conditions
 Growing demand – reduces rivalry
 Declining demand – encourages rivalry
 Cost Conditions
 High fixed costs – profitability leveraged by volume
 Slow demand/growth – intense rivalry/lower profits
 Exit Barriers
 Write-off assets  High fixed cost
 Economic dependence  Emotional attachment
 Maintain assets  Bankruptcy regulations
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2-5
Bargaining
Power of Buyers
“…consumers/end-users who…use product or intermediaries
that distribute or retail the products.” Buyers most powerful
when:

1.Suppliers = many small companies,


buyers large/few
2.Purchase in large quantities
3.Suppliers depend on buyers for large %
of orders
4.Buyers switching costs are low
5.Buyer can purchase from several
6.Buyers supply own needs
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2-6
Bargaining
Power of Suppliers
“…provide inputs… in the industry.” Suppliers most
powerful when:

1.Few substitutes
2.Industry not important to suppliers
3.Buyers- purchase large % of orders
4.Buyers experience significant switching
costs
5.Suppliers can threaten to enter industry
 Produce/supply own product
 Buyers cannot threaten to make own inputs
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2-7
Substitute Products
“…products from different businesses or
industries…can satisfy similar customer needs.”

1.Existence of close substitutes a


strong threat - Substitutes limit price
that companies can charge for
product
2.Substitutes a weak competitive force
Few close substitutes
Companies in industry can raise prices
and earn additional profits.
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2-8

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