Porter's 5 Forces

Rivalry Among Existing Competitors

Price discounting, new product introductions, advertising campaigns, and service improvements.

• Limits the profitability of an industry

• The degree to which rivalry drives down an industry’s profit potential depends, on the intensity with which companies compete and on the basis on which they compete. 

Competitive Rivalry is HIGH When

• There are many competitors in the industry.

• The competitors are roughly of equal size

• The industry growth rate is slow, zero or even negative

• Exit barriers are high

• Products and/or services are direct substitutes

Bargaining Power of Suppliers

Capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants.

• Powerful suppliers can squeeze profitability out of an industry that is unable to pass on cost increases in its own prices. 

Bargaining Power of Suppliers is HIGH When

• Suppliers offer products that are differentiated

• Incumbent firms face significant switching cost when changing suppliers

• There are no available substitutes for the products/services that suppliers offer

• Suppliers can credibly threaten to forward-integrate into the industry

Bargaining Power of Buyers

Powerful customers can capture more value by forcing down prices, demanding better quality or more service (thereby driving up costs), and generally playing industry participants off against one another, all at the expense of industry profitability.

• Powerful if they have negotiating leverage relative to industry participants, especially if they are price sensitive, using their clout primarily to pressure price reductions. 

Bargaining Power of Buyers is HIGH When

• There are a few large buyers

• Buyers purchase in large quantities relative to the size of a single seller

• The industry’s products are standardized or undifferentiated commodities

• Buyer’s face little to no switching costs

• Buyers can credibly threaten to backward-integrate in their supply chain

Threat of New Entrants

Bring new capacity and a desire to gain market share that puts pressure on prices, costs, and the rate of investment necessary to compete.

• When new entrants are diversifying from other markets, they can leverage existing capabilities and cash flows to shake up competition.

Threat of New Entrants are HIGH When

• Customer switching costs are low

• Capital requirements are low

• Incumbents do not possess:

  • proprietary technology

  • established brand equity

  • the ability for economies of scale

• New entrants expect that incumbents will not or cannot retaliate

Threat of Substitutes

Performs the same or a similar function as an industry’s product by a different means but exists OUTSIDE the current industry.

• Videoconferencing is a substitute for travel

•  Plastic is a substitute for aluminum

• E-mail is a substitute for express mail. 

Threat of New Substitutes is HIGH When

• The substitute offers an attractive price-performance trade-off

• The buyers cost of switching to the substitute is low

Complements

Organizations whose products and services are complementary to the primary organization’s products and services.

• There is no direct relationship between the extent of complements and profitability.

• Sometimes having many complements is consistent with high industry profitability, sometimes with low profitability.

  • It has to do with how complements affect the five forces