Porter’s Five Forces Model to Analyze Competitive Landscape

Porter’s Five Forces is a framework developed by Harvard Business School professor Michael E. Porter to analyze the competitive environment of an industry.

The framework identifies five competitive forces that affect the profitability and attractiveness of a market or industry.

These five forces are –

  1. Threat of new entrants
  2. Bargaining power of suppliers
  3. Bargaining power of buyers
  4. Threat of substitute products or services
  5. Rivalry among existing competitors

By analyzing these five forces, businesses can better understand the dynamics of their industry and make informed decisions about strategy and resource allocation.

In this article, we will explore each of these five forces in detail and provide examples of how they apply in different industries.

Threat of new entrants

The first force that Porter identified is the threat of new entrants to an industry.

New entrants can pose a threat to existing players in the industry by increasing competition and potentially lowering prices.

The threat of new entrants depends on the barriers to entry in the industry, such as the cost of setting up a new business, access to distribution channels, and government regulations.

Industries with high barriers to entry, such as the airline industry or the pharmaceutical industry, are less likely to face threats from new entrants.

In contrast, industries with low barriers to entry, such as the restaurant industry or the retail industry, are more susceptible to new entrants.

For example, the coffee shop industry has low barriers to entry, which has led to a large number of new entrants in recent years.
This increased competition has put pressure on existing players to differentiate themselves and provide better value to customers.

Bargaining power of suppliers

The bargaining power of suppliers is the second force in Porter’s framework.

Suppliers can influence the profitability of an industry by raising prices or reducing the quality of their products or services.

The bargaining power of suppliers depends on factors such as the number of suppliers, the availability of substitute products or services, and the importance of the supplier’s product to the industry.

Industries with a small number of suppliers or with unique products or services are more likely to face high supplier bargaining power.

For example, the automobile industry is highly dependent on a small number of large suppliers for critical components such as engines and transmissions. This gives suppliers significant bargaining power over automakers.

On the other hand, industries with many suppliers or with commoditized products or services are less likely to face high supplier bargaining power.

For example, the grocery store industry has many suppliers for its products, which limits the bargaining power of any individual supplier.

Bargaining power of buyers

The third force in Porter’s framework is the bargaining power of buyers.

Buyers can influence the profitability of an industry by demanding lower prices, higher quality products or services, or better customer service.

The bargaining power of buyers depends on factors such as the number of buyers, the availability of substitute products or services, and the importance of the industry’s product to the buyer.

Industries with a small number of buyers or with unique products or services are more likely to face high buyer bargaining power.
For example, the aircraft industry is highly dependent on a small number of large buyers, such as airlines and governments. This gives buyers significant bargaining power over aircraft manufacturers.

On the other hand, industries with many buyers or with commoditized products or services are less likely to face high buyer bargaining power. For example, the clothing industry has many buyers, which limits the bargaining power of any individual buyer.

Threat of substitute products or services

The fourth force in Porter’s framework is the threat of substitute products or services.

Substitute products or services can limit the profitability of an industry by providing customers with alternatives to the industry’s product or service.

The threat of substitutes depends on factors such as the availability of substitute products or services, the relative price and quality of substitutes, and the level of switching costs for customers.

Industries with few or no substitutes, or with products or services that are essential to customers, are less likely to face a high threat of substitutes.

For example, the healthcare industry has few substitutes for medical treatments and procedures, which limits the threat of substitutes.

On the other hand, industries with many substitutes, or with products or services that are non-essential, are more likely to face a high threat of substitutes.

For example, the soft drink industry faces competition from a wide range of substitute products, such as juices, teas, and energy drinks.

Rivalry among existing competitors

The fifth force in Porter’s framework is the rivalry among existing competitors.

Rivalry can be intense in industries where there are many competitors, where competitors have similar products or services, or where there is a lack of differentiation.

Rivalry can lead to price competition, reduced profits, and increased marketing and advertising expenses.

The intensity of rivalry depends on factors such as the number of competitors, the size and growth rate of the industry, and the level of differentiation among competitors.

For example, the airline industry is highly competitive, with many competitors offering similar products and services.

This has led to intense price competition and reduced profitability for some airlines.

On the other hand, industries with few competitors, or with products or services that are highly differentiated, are less likely to face intense rivalry.

For example, the luxury watch industry has few competitors and high levels of product differentiation, which limits the intensity of rivalry among existing competitors.

Using Porter’s Five Forces

By analyzing these five forces, businesses can better understand the dynamics of their industry and make informed decisions about strategy and resource allocation.

For example, a company in an industry with a high threat of new entrants may need to invest in barriers to entry, such as patents or exclusive partnerships with suppliers, in order to protect its market share.

Similarly, a company in an industry with high supplier bargaining power may need to diversify its supplier base or negotiate better terms with its suppliers in order to reduce costs and maintain profitability.

In addition to analyzing each of the five forces, businesses can also use Porter’s framework to identify opportunities for growth and differentiation.

For example, a company in an industry with intense rivalry may need to differentiate its products or services through innovation or marketing in order to stand out from its competitors.

Conclusion

Porter’s Five Forces is a powerful framework for analyzing the competitive environment of an industry.

By considering these factors businesses can gain valuable insights into the factors that affect their profitability and competitiveness.

By using Porter’s framework to analyze their industry, businesses can make informed decisions about strategy, resource allocation, and growth opportunities.

Ultimately, businesses that understand the dynamics of their industry and respond effectively to the competitive forces they face are more likely to succeed and thrive in the long term.