Porter's Five Forces: Definition, Model & Examples (2024)

Let's take the example of the airline industry:

• the threat of new entrants is low due to the high capital requirements needed to enter the market, such as the cost of purchasing aeroplanes and building infrastructure;
• the bargaining power of suppliers, such as aeroplane manufacturers, can be high due to the limited number of suppliers in the industry;
• the bargaining power of buyers, such as individual customers or travel agencies, can also be high due to the availability of information on prices and services
• the threat of substitute products, such as train travel, can be moderate, while the intensity of competitive rivalry is typically high due to a large number of competitors in the industry.

By analyzing these five forces, companies can develop a better understanding of the competitive dynamics of the industry and make strategic decisions accordingly.

Threat of new entrants

New entrants to the market can threaten your own sales volume and market share. The harder it is to enter the market the easier it is to maintain a market position.

Examples of entry barriers include:

• Cost of entry,

• Brand loyalty,

• Government policies,

  See Also

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• Specialist knowledge.

For example, in the smartphone industry, there are high barriers to entry due to the high cost of research and development, manufacturing, and marketing. This has allowed established players like Apple and Samsung to maintain a dominant market position.

Bargaining power of buyers

Bargaining power of buyers is the ability that customers have to drive prices lower or higher.

Buyers' power is high when there are few large players and proportionally many suppliers. If many sources are available, buyers may shop around for other materials or supplies which may include a risk of losing a key client.

Factors determining the power of buyers:

• Number of customers,

• Order size,

• Differences between competitors,

• Buyers' ability to substitute,

• Price sensitivity,

• Information availability.

Example of bargaining power of buyers: Large retailers like Walmart have significant bargaining power over suppliers due to their size and purchasing power. This can lead to lower prices for products and lower profits for suppliers.

Competitive Rivalry

The type of competition can vary depending on the balance of the competitive relationship. The competitive rivalry is high when there are numerous competitors because then consumers can easily switch to competitors offering similar products or services. Similar size companies are likely to be more fierce than when there are large and small companies. It is also worth keeping an eye on the market growth as a growing market allows both companies to grow in sales and a stagnant market means that a market steal is required.

Therefore, it is important to know your competitors:

• Number of competitors,

• Quality differences,

• Concentration of industry,

• Brand loyalty,

• Market growth.

Example of competitive rivalry: In the fast food industry, there are many competitors that offer similar products and services. To differentiate themselves, companies like McDonald's and Burger King have engaged in intense advertising and promotional campaigns to attract customers and gain market share.

Porter used the airline industry example to explain his concepts. We will use fast food industry as an example of Porter's five forces analysis.

1. Threat of new entrants: The fast food industry has relatively low barriers to entry, as it doesn't require significant capital investment or technical expertise to start a fast food restaurant. However, established players like McDonald's, Burger King, and Wendy's have significant economies of scale and brand recognition, which can make it difficult for new entrants to gain a foothold in the market.

2. Bargaining power of suppliers: The fast food industry is highly dependent on a few key suppliers, such as food distributors, meat producers, and soft drink companies. This gives these suppliers significant bargaining power over fast food companies. For example, if a meat producer were to raise prices, it could significantly impact the profitability of fast food restaurants that rely on that supplier.

3. Bargaining power of buyers: Fast food customers have a high degree of bargaining power, as they can easily switch to a competitor or substitute product if they are dissatisfied with the prices or quality of the food. Additionally, consumers are increasingly demanding healthier and more sustainable food options, which can put pressure on fast food companies to change their menus.

4. Threat of substitute products or services: The fast food industry faces significant competition from other types of restaurants, such as casual dining and fast casual restaurants. Additionally, many consumers are choosing to cook at home or order food delivery, which can also impact the sales of fast food companies.

5. Intensity of competitive rivalry: The fast food industry is highly competitive, with many players vying for market share. Companies like McDonald's, Burger King, and Wendy's engage in intense advertising and promotional campaigns to attract customers and gain market share. Additionally, the rise of fast casual restaurants like Chipotle and Panera Bread has increased competition in the industry.

Porter's Five Forces - Key Takeaways

• Porter's Five Forces is a framework that examines the level of competition within an industry by analyzing five key forces.

• Porter's five forces are competitive rivalry, new entrants, power of buyers, power of suppliers and threat of substitutes.

• The purpose of Porter's Five Forces analysis is to help businesses understand the competitive dynamics of their industry and make more informed strategic decisions.

• Strengths of Porter's five forces include comprehensiveness, ease of use, it identifying who hold the power in the industry and opportunities and threats

• Weaknesses of Porter's five forces include limited scope, static analysis, subjectivity.

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