Porters Five forces - a simple explanation Porter five forces analysis is a framework to analyse level of competition within an industry and business strategy development. It draws upon industrial organisation (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market

2. The model originated from Michael
E. Porter's 1980 book
"Competitive Strategy: Techniques for
Analysing Industries and
Competitors."

3. Porter identified five competitive
forces that shape every single
industry and market.
These forces help us to analyse
everything from the intensity of
competition to the profitability and
attractiveness of an industry.

4. Porter five forces analysis is a
framework to analyse level of
competition within an industry and
business strategy development.
It draws upon industrial organisation
(IO) economics to derive five forces
that determine the competitive
intensity and therefore attractiveness
of a market

6. Supplier Power:
Here you assess how easy it is for suppliers to
drive up prices.
This is driven by the number of suppliers of each
key input, the uniqueness of their product or
service, their strength and control over you, the
cost of switching from one to another, and so on.
The fewer the supplier choices you have, and the
more you need suppliers' help, the more powerful
your suppliers are.

7. Here are a few reasons that suppliers might have
power:
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

8. Buyer Power:
Here you ask yourself how easy it is for buyers to
drive prices down.
Again, this is driven by the number of buyers, the
importance of each individual buyer to your
business, the cost to them of switching from your
products and services to those of someone else,
and so on.
If you deal with few, powerful buyers, then they
are often able to dictate terms to you.

9. Here are a few reasons that customers 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 can't do without it
The supplying industry has a higher profitability
than the buying industry

10. Competitive Rivalry:
What is important here is the number and
capability of your competitors.
If you have many competitors, and they offer
equally attractive products and services, then
you'll most likely have little power in the situation,
because suppliers and buyers will go elsewhere if
they don't get a good deal from you.
On the other hand, if no-one else can do what
you do, then you can often have tremendous
strength.

11. A highly competitive market might result from:
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.

12. Threat of Substitution:
This is affected by the ability of your customers to
find 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 by doing the process manually or by
outsourcing it.
If substitution is easy and substitution is viable,
then this weakens your power.

13. Here are a few factors that can affect the threat
of substitutes:
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

14. Threat of New Entry:
Power is also affected by the ability of people to
enter your market. (Barriers to entry)
If it costs little in time or money to enter your
market and compete effectively, if there are few
economies of scale in place, or if you have little
protection for your key technologies, then new
competitors can quickly enter your market and
weaken your position.
If you have strong and durable barriers to entry,
then you can preserve a favourable position and
take fair advantage of it.

15. Definition of ‘Barriers to entry’
The existence of high start-up costs or other
obstacles that prevent new competitors from
easily entering an industry or area of business.
Barriers to entry benefit existing companies
already operating in an industry because they
protect an established company's revenues and
profits from being whittled away by new
competitors.

16. Definition of ‘Barriers to entry’ (2)
Barriers to entry can exist as a result of
government intervention (industry regulation,
legislative limitations on new firms, special tax
benefits to existing firms, etc.), or they can occur
naturally within the business world.
Some naturally occurring barriers to entry could
be technological patents or patents on business
processes, a strong brand identity, strong
customer loyalty or high customer switching
costs.

17. Using the Tool
To use the tool to understand your situation, look
at each of these forces one-by-one and write your
observations on a worksheet.
Brainstorm the relevant factors for your market
or situation, and then check against the factors
listed for the force in the diagram above.
Then, mark the key factors on the diagram, and
summarise the size and scale of the force on the
diagram. An easy way of doing this is to use, for
example, a single "+" sign for a force moderately
in your favour, or "-" for a force strongly against
you.

18. Using the Tool
Then look at the situation you find using this
analysis and think through how it affects you.
Bear in mind that few situations are perfect;
however looking at things in this way helps you
think through what you could change to increase
your power with respect to each force.
What’s more, if you find yourself in a structurally
weak position, this tool helps you think about
what you can do to move into a stronger one.

19. An example (1)

20. An example (2)

21. Thank you
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