Porter's Five Forces

Understanding Competitive Forces to Maximize Profitability

Porter’s Five Forces is a simple yet a very powerful tool in understanding the competitiveness of
the business environment and formulating effective strategies for the potential profitability of the
business. Understanding the forces that can affect the profitability of the business is very vital so
entrepreneurs will be able to adjust their strategies, take fair advantage of their strengths, improve
weaknesses and avoid taking wrong steps in the future.

The following Five Forces will help the owners and the manager of the business to decide on
how to improve the industry position of the business and how to increase profitability without
sacrificing much of the quality and prices of the products offered.

 Supplier Power is the ability of suppliers to drive up the prices of the inputs or raw
materials needed in the manufacturing of products.
 Buyer Power is the strength of the customers to drive down the offered prices.
 Competitive Rivalry is the strength of competition in the industry.
 The Threat of Substitution is the extent to which different products and services can be
used in place of the products and services offered by the business.
 The Threat of New Entry is the ease with which new competitors can enter the market if
they see that the business is making good profits, and then drive the prices down.

The marketing team personally visited the place where the business was located, they have
gathered enough information and keen observation to evaluate the different forces that shapes the
industry and the market where the business belongs to. The team came up with the following:

1. Competitive Rivalry
 Several Competitors Located in the Coverage Area of the Business
 Commodity products Offered; but the Business Offers Higher Quality of
Products and Services
 Moderately High Switching Cost
 Cost of Leaving the Market is Relatively High
 High Customer Loyalty
Overall: ++

The competitive rivalry within the industry where the business belongs to is intense, several competitors
are practicing aggressive price cuts and marketing campaigns. But, the business offers products and
services that no one else does. According to the manager, it is the affordability of products and the
quality of service that captures the heart of their customers. This advantage puts the business in a
strong, favorable position.
 2. Supplier Power
 Effective Dealings with a Few Staunch Suppliers
 Large, Direct Suppliers
 Unique and Rare Products and Quantity Discounts Offered
 Relatively High Switching Cost
 Neutral Supplies Power to Drive the Prices Up
Overall: 0

The suppliers of the business doesn’t have the power to impact the price or the profit generated by the
business unless driven by the strong power of supply and demand since according to the manager, he
made safe deals with his chosen suppliers. The business purchases raw materials in bulk and the
suppliers are willing to offer quantity discounts, the key is to come up with the optimum point where
both parties will benefit. Therefore, the force is in neutral position.

3. Buyer Power
 Fast-Increasing Number of Customers
 Numerous Large Orders but Happens Seasonally
 Extremely High Price Sensitivity for Customers
 The Chances of Customers being able to Find Substitutes to the Offered
Products is Moderately High
 High Switching Cost
 Moderately High Buyer Power to Drive the Prices Down
Overall: -

As the customers increases, so is the power of the business against the forces of the buyers to drive the
prices and the profitability of the business in a downward direction. But, there is an extremely high price
sensitivity in the perceptions of the customers and this can put a downward pressure in the prices of the
products.

4. Threat of Substitution
 There is a Moderate Possibility of Substitution but, the Products Offered are Not
Perfectly Substitutable
 Business Offers Innovative Products that Others Can’t Extent
 Products Aren’t Easy and Cheap to Make, Strengthening the Position of the
Business
 The Threats of Substitution is Relatively Low
Overall: +

The customers may find other products that can be taken in replacement with the products offered by
the business, but there will be significant differences in the quality and taste since the manager himself
personally develops recipes that only accessible by the management. The manager also innovates and
add twists to the offered products in accordance to the latest trends in the industry. Therefore, the
business holds a moderately strong position in this category.
 5. Threat of New Entry
 Entering the Industry is Relatively Easy, Getting a Foothold in the Market is
Extremely Hard
 Knowledge, Experience, and Skills are Needed to Survive in the Field of
Competition
 Moderately High Cost Advantages; Resources are Cost Effective
 Extremely High Protection For Key Technologies
 Strong and Durable Barriers to Enter
Overall: +

It will take a lot of effort and money to enter the chosen market of the business and be able to compete
effectively. It is important for the business to take a firm grip on its customers to ensure long term
profitability and maintain its foothold in the market.