PORTER’S FIVE
FORCE ANALYSIS
What is Porter’s Five Force Analysis
Five forces analysis is a set of ideas, a framework, a tool that states that there are five key competitive forces
that serve to minimize the prospects for profitability is a particular industry. It is a method of analyzing the
operating environment of competition of a business.
BARGAINING
POWER OF
SUPPLIERS
THREAT
OF
ENTRY
INTENSITY
OF
RIVALRY
BARGAINING
POWER OF
BUYERS
THREAT
OF
SUBSTITU
TES
THREAT OF ENTRY
• Threat of entering is simply the threat of a new business entering your industry.
• Potential new entrants might want the threat to entry barriers to be low and therefore the
threat of entry to be high, but those already in the industry want the threat to be low.
What Can Make Threat of Entry Low?
i.
High sunk costs: Sunk costs is simply the money that has already been spent and
cannot be recovered. If the cost of capital is high, it won’t be much of a problem but if
the sunk costs are high, potential new entrants might pause a bit. They represent risks
to these potential new entrants that if things don’t work out in their attempt to enter
the industry, they are going to have difficulty recovering those costs or investments.
THREAT OF ENTRY
II.
Incumbents have really dominant and competitive advantage: If new entrants are going to be at
a competitive disadvantage, compared to existing players, it just might not be profitable to enter.
Things like intellectual property, patents, licenses. If to succeed in an industry requires you need
a certain license or IP and someone already has it, it would be had for new entrants.
Large economies of scale relative to demand is a competitive advantage. Economies of scale is
the idea that the more output increases, the average cost per unit will come down. And come
down to the point that is called minimum efficient scale(MES). MES is the point you need to
achieve to be cost effective in an industry. Different industries have different sort of levels of
MES. To the extent the economies of scale don’t matter much, the threat of entry is going to be
high. In other words is the company getting better at this? Is it lowering manufacturing cost
because they are just doing more of it? Just like the idea that practice makes perfect.
THREAT OF ENTRY
III. If the new entrants are going to face serious retaliation from incumbent members of the
industry.
THREAT OF SUBSTITUTES
• Substitutes are products that are similar to other products or
services, but not exactly the same. But in the eyes of some
consumers or buyers, they might under certain conditions
substitute in and out for another. The threat of substitute taking
away your sales. The threat should be low from the perspective
of those in the industry.
BARGAINING POWER OF BUYERS
• If we are negotiating over a price for our goods or service in the industry, who gets to
wield a little more power in negotiation. Do buyers set the price or sellers do? Its better
for businesses if the bargaining power is lower. Buyers would have less power if they are
less concentrated. If you are selling to a variety of buyers, those buyers won’t have as
much power.
Many
Monopoly
Power
Competitive
Few
Mutual
Dependence
Monopsony
Power
Buyers
Few
Suppliers
Many
BARGAINING POWER OF SUPPLIERS
• Supplier bargaining power will be lower when sellers are not concentrated. If the sellers
are not concentrated.
• If the sellers are few, they have a much greater ability to set price for the goods or services.
• If firms have other alternatives, the bargaining power of suppliers will be lower.
• If suppliers can’t forward integrate into your business, their bargaining power will be low.
INTENSITY OF RIVALRY
• This is about how intense is the rivalry among competitors in a particular industry. Those in
the industry want the intensity to be low.
• How can you tell the intensity?
i.
Number of competitors: The smaller the number the lesser the rivalry.
ii.
Opportunities to differentiate in the industry.
THANK YOU
ANY QUESTIONS?