PORTER’S

FIVE FORCES
Reporters: Mary Joy Mercado
Josette P. Bantique
Justine Alcantara
Trixie Bautista
Ma. Lynette Malawit
OOPSN NAD ROFK
SPOON AND FORK
CIPVOTMEETI VIRYLAR
This looks at the number and strength of your
competitors
COMPETITIVE RIVALRY
 PPIESLUR ROWPE
This is determined by how easy it is for your
suppliers to increase their prices

SUPPLIER POWER
TEMCOUSR ERWPO
How many buyers are there, and how
big are their orders?
CUSTOMER POWER
SBSTETUIUT HATRET
This refers to the likelihood of your customers
finding a different way of doing what you do
SUBSTITUTE THREAT
EWN RENYT ERAHTT
Your position can be affected by people's
ability to enter your market
NEW ENTRY THREAT
Porter's Five Forces is a simple
but powerful tool for
understanding the
competitiveness of your
business environment, and
for identifying your strategy's
potential profitability.
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.
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?
 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.
NUMBER OF COMPETITORS
QUALITY DIFFERENCE
SWITCHING COSTS
CUSTOMER LOYALTY
INTENSITY OF RIVALRY IS HIGH IF…

 Competitors are numerous

 Product are undifferentiated

 Brand loyalty is insignificant

 Competitors have equal market share

 Industry growth is slow

 Fixed cost are high

INTENSITY OF RIVALRY IS LOW IF…

 Competitors are few

 Products are differentiated

 Brand loyalty is significant

 Competitors have an equal market share

 Industry growth is fast

 Fixed cost are low

 POWER OF SUPPLIERS
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.
NUMBER OF SUPPLIERS
SWITCHING COST
 POWER OF CUSTOMERS
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?
 A smaller and more powerful client
base means that each customer has
more power to negotiate for lower
prices and better deals. A company
that has many, smaller,
independent customers will have an
easier time charging higher prices
to increase profitability.
NUMBER OF CUSTOMER
PRICE SENSITIVITY
SWITCHING COST
THREAT OF
SUBSTITUTES
It is the availability of a product that the consumer
can purchase instead of the industry’s product. A
substitute product is a product from another industry
that offers similar benefits to the consumer as the
product produced by the firms within the industry.
According to Porter’s 5 forces, threat of substitutes
shapes the competitive structure of an industry.
 Threat of Substitutes – Determining
Factors
First, if the consumer’s switching costs are low, meaning there is
little if anything stopping the consumer from purchasing the
substitute instead of the industry’s product, then the threat of
substitute products is high. Second, if the substitute product is
cheaper than the industry’s product – thereby placing a ceiling
on the price of the industry’s product – then a threat of
substitutes high risk is the case. Third, if the substitute product is
of equal or superior quality compared to the industry’s
product, the threat of substitutes is high. And fourth, if the
functions, attributes, or performance of the substitute product
are equal or superior to the industry’s product.
 Threat of Substitutes – Analysis
The Threat of Substitutes Porter places High risk on:
• Substitute product is cheaper than industry product
• Consumer switching costs are low
• Substitute product quality is equal or superior to industry product
quality
• Substitute performance is equal or superior to industry product
performance

The Porter Threat of Substitutes Low Risk Situation:

• Consumer switching costs are high
• Substitute product is more expensive than industry product
• Substitute product quality is inferior to industry product quality
• Substitute performance is inferior to industry product performance
• No substitute product is available
 Threat of Substitutes Interpretation
A low threat of substitute products makes an
industry more attractive. In addition, it increases
profit potential for the firms in the industry.
Conversely, a high threat of substitute products
makes an industry less attractive. It also
decreases profit potential for firms in the
industry.
 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.
BARRIERS TO ENTRY
COST ADVANTAGE
KEY POINTS
Porter's Five Forces Analysis is an
important tool for understanding the
forces that shape competition within
an industry. It is also useful for
helping you to adjust your strategy to
suit your competitive environment,
and to improve your potential profit.
It works by looking at the strength of five important forces
that affect competition:
 Supplier Power: the ability of suppliers to drive up the
prices of your inputs.
 Buyer Power: the strength of your customers to drive down
your prices.
 Competitive Rivalry: the strength of competition in the
industry.
 The Threat of Substitution: the extent to which different
products and services can be used in place of your own.
 The Threat of New Entry: the ease with which new
competitors can enter the market if they see that you are
making good profits (and then drive your prices down).
By thinking about how each force affects you, and by identifying its
strength and direction, you can quickly assess your position.
You can then look at what strategic changes you need to make to
deliver long-term profit.
PORTER’S
FIVE
FORCES
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