The model originated from Michael E. Porter's 1980 book "Competitive Strategy: Techniques for Analyzing
Industries and Competitors." Since then, it has become a frequently used tool for analyzing a company's
industry structure and its corporate strategy.
In his book, Porter identified five competitive forces that shape every single industry and market. These
forces help us to analyze everything from the intensity of competition to the profitability and attractiveness
of an industry. Figure 1 shows the relationship between the different competitive forces.
1. THE THREAT OF NEW ENTRANTS
The easier it is for new companies to enter the industry, the more cutthroat competition
there will be. Factors that can limit the threat of new entrants are known as barriers to
entry. Some examples include:
Existing loyalty to major brands
Incentives for using a particular buyer (such as frequent shopper programs)
High fixed costs
Scarcity of resources
High costs of switching companies
Government restrictions or legislation
2. POWER OF SUPPLIERS
This is how much pressure suppliers can place on a business. If one supplier has a large
enough impact to affect a company's margins and volumes, then it holds substantial
power. Here are a few reasons that suppliers might have power:
There are very few suppliers of a particular product
There are no substitutes
Switching to another (competitive) product is very costly
The product is extremely important to buyers - can't do without it
The supplying industry has a higher profitability than the buying industry
3. POWER OF BUYERS
This is how much pressure customers can place on a business. If one customer has a
large enough impact to affect a company's margins and volumes, then the customer hold
substantial power. Here are a few reasons that customers might have power:
Small number of buyers
Purchases large volumes
Switching to another (competitive) product is simple
The product is not extremely important to buyers; they can do without the product for a
period of time
Customers are price sensitive
4. AVAILABILITY OF SUPPLIERS
What is the likelihood that someone will switch to a competitive product or service? If the
cost of switching is low, then this poses a serious threat. Here are a few factors that can
affect the threat of substitutes:
The main issue is the similarity of substitutes. For example, if the price of coffee rises
substantially, a coffee drinker may switch over to a beverage like tea.
If substitutes are similar, it can be viewed in the same light as a new entrant.
5. COMPETITIVE RIVALRY
This describes the intensity of competition between existing firms in an industry. Highly
competitive industries generally earn low returns because the cost of competition is high.
A highly competitive market might result from:
Many players of about the same size; there is no dominant firm
Little differentiation between competitors products and services
A mature industry with very little growth; companies can only grow by stealing customers
away from competitors
EXAMPLE OF THE 5 FORCES IN INDUSTRY
Threat of New Entrants/Potential Competitors: Medium Pressure
Entry barriers are relatively low for the beverage industry: there is no consumer switching cost and zero capital requirement. Ther e is an
increasing amount of new brands appearing in the market with similar prices than Coke products. Coca-Cola is seen not only as a beverage
but also as a brand. It has held a very significant market share for a long time and loyal customers are not very likely to t ry a new brand.
Threat of Substitute Products: Medium to High pressure
There are many kinds of energy drink s/soda/juice products in the market. Coca-cola doesn’t really have an entirely unique flavor. In a blind
taste test, people can’t tell the difference between Coca-Cola and Pepsi.
The Bargaining Power of Buyers: Low pressure
The individual buyer no pressure on Coca-Cola. Large retailers, like Wal-Mart, have bargaining power because of the large order quantity, but
the bargaining power is lessened because of the end consumer brand loyalty.
The Bargaining Power of Suppliers: Low pressure
The main ingredients for soft drink include carbonated water, phosphoric acid, sweetener, and caffeine. The suppliers are not con centrated or
differentiated. Coca-Cola is likely a large, or the largest customer of any of these suppliers.
Rivalry Among Existing Firms: High Pressure
Currently, the main competitor is Pepsi which also has a wide range of beverage products under its brand. Both Coca -Cola and Pepsi are the
predominant carbonated beverages and committed heavily to sponsoring outdoor events and activities. There are other soda brands in the
market that become popular, like Dr. Pepper, because of their unique flavors. These other brands have failed to reach the success that Pepsi
or Coke have enjoyed.