Porter’s Five Forces Model

Overview

The tool was created by Harvard Business School professor Michael Porter, to analyze an
industry's attractiveness and likely profitability. Since its publication in 1979, it has become one
of the most popular and highly regarded business strategy tools.

Porter recognized that organizations likely keep a close watch on their rivals, but he
encouraged them to look beyond the actions of their competitors and examine what other factors
could impact the business environment. He identified five forces that make up the competitive
environment, and which can erode your profitability. These are:

Competitive Rivalry

This looks at the number and strength of your competitors. How many rivals do you have?
Who are they, and how does the quality of their products and services compare with yours?

Where rivalry is intense, companies can attract customers with aggressive price cuts and
high-impact marketing campaigns. Also, in markets with lots of rivals, your suppliers and buyers
can go elsewhere if they feel that they're not getting a good deal from you.

On the other hand, where competitive rivalry is minimal, and no one else is doing what
you do, then you'll likely have tremendous strength and healthy profits.

Supplier Power

This is determined by how easy it is for your suppliers to increase their prices. How many
potential suppliers do you have? How unique is the product or service that they provide, and how
expensive would it be to switch from one supplier to another?

The more you have to choose from, the easier it will be to switch to a cheaper alternative.
But the fewer suppliers there are, and the more you need their help, the stronger their position
and their ability to charge you more. That can impact your profit.

Buyer Power

Here, you ask yourself how easy it is for buyers to drive your prices down. How many
buyers are there, and how big are their orders? How much would it cost them to switch from
your products and services to those of a rival? Are your buyers strong enough to dictate terms to
you?

When you deal with only a few savvy customers, they have more power, but your power
increases if you have many customers.

Threat of Substitution
 This refers to the likelihood of your customers finding a different way of doing what you
do. For example, if you supply a unique software product that automates an important process,
people may substitute it by doing the process manually or by outsourcing it. A substitution that is
easy and cheap to make can weaken your position and threaten your profitability.

Threat of New Entry

Your position can be affected by people's ability to enter your market. So, think about how
easily this could be done. How easy is it to get a foothold in your industry or market? How much
would it cost, and how tightly is your sector regulated?

If it takes little money and effort to enter your market and compete effectively, or if you
have little protection for your key technologies, then rivals can quickly enter your market and
weaken your position. If you have strong and durable barriers to entry, then you can preserve a
favorable position and take fair advantage of it.
 Porter’s Five Forces Analysis

Colgate-palmolive

Gaining Power of Suppliers

One of the five forces which Porter formulated for an organization to look into in order
to form a competitive advantage is gaining power of suppliers. The global reach and diverse
portfolio of assets attract numerous investors. Colgate-Palmolive and other major competitors are
both viewed by investors as home and oral care companies which have considerable positive
investment strengths. Most often the comparison is always with P&G. Although, Colgate-
Palmolive is viewed by many as at par with its competitors, yet, what was lacking in their
management is the ‘lack of perceived differentiation’ which somehow impaired the investment
decision-making process. Moreover, even though Colgate-Palmolive has ‘no strategy that is
unique or differentiating relative to the other companies’, the threat of bargaining power of
suppliers is low due to partnership, supply chain management, training, and dependency.

Bargaining P ower of Customers

Customers are the lifeblood of the business. The existence and growth of a business
company is dependent on customers. CP (Colgate-Palmolive) is serving globally with 25 million
customers a day in over 200, 000 plant around the globe. There is a cohesive loyalty among
buyers and sellers of energy in Colgate-Palmolive for several reasons like the attractive
incentives and value added, partnering and supply chain management. Moreover, investors and
stakeholders expressed their satisfaction on the services offered by the company. Again, this can
be reflected on the 2001 case study interview which was recorded verbatim, in which two
elements emerged fundamental to the satisfaction of customers – technology and its diversified
presence. One owns Colgate-Palmolive because of its strong diversified presence and good
technology while another one noted that it is because it is cheaper, yet with a high quality of
products and high returns over the course of the cycle compared to other major companies.
Moreover, significantly noted were two comments. On one hand, the reasons why many were
satisfied with the performance because of its huge asset base, financial and political clout that
was why they successfully covered operations in places like China, Russia, and the Middle East.
On the other hand, CP’s management restructuring that reduced costs focus on profitability,
financial discipline and its way for shares repurchase.

Threat of New Entrants

In the home and oral care industry primarily on the soap and natural products and
reserves, the companies’ management strategy reduced the friction of threat among its new
competitors in the business by increasing minimum efficient scales of operations, its cohesive
and good status with suppliers/distributors, retaliation tactics, protection of property and
establishing a competitive and trustful image to its customers.

Moreover, the role of advanced technology set them at par with other entrants in the business. In
2001, technology had differentiated CP from its competitors. Leadership in promising toothpaste
from solid to gel technology that delivers new brushing sensations. There reputation was
leveraged in order to establish a solid foundation against threats of the new entrants. The
leverage of their reputation is build solidly on their total strengths both tangible and intangible
like technology, products, adherence to business ethics, code of conduct, and corporate social
responsibility that encourages consumers to brand loyalty.

Threat of Substitutes

The threats of substitutes in which customers switch product references are primarily
caused by several external and internal factors. One of the factors in which customers tend to
switch their preferences is the price cost of a product. If a product raises its cost value, customers
may have a second thought of sticking into as his/her preference; therefore, the tendency is that
the shift and switch of preference occurred. Most often, in this kind of business like marketing an
energy reserves, the threat of substitution of customers come in the instability of a price. The
price cost of a product if it increases due to social and political factors, it stand to be a threat for
the company. However, the Colgate-Palmolive good strategy like increasing switching costs,
alliances, customer surveys to learn about their preferences, accentuated differences and the
entrance of substitute market, these reduced the threat of substitutes.

Competitive Rivalry between existing players

In any business price competition is significant because it attracts customers, the less you
price a product, the more customers you gain, yet, in competitive rivalry, in order to reduce it,
avoidance to price competition is necessary in which the Colgate-Palmolive observed. Their
competition is not on price but on how to manage strategy that would best leverage a product. CP
uses different strategies to market their product and be competitive. Their differentiation and
different segmentation of their products set an edge for them, moreover, their healthy
communication with competitors contribute positively to the competition. The competition
should not be taken personally but a matter of business and professional work.

Colgate-Palmolive has a competitive advantage not only due to the facts mentioned above
but on the ability of managing the whole process of the business. Good financial management
and diversified course of business bring them enormous customers and stakeholders.