Porter's 5 forces - What are they? example, and more

Porter's 5 forces

Analysis model of competitive market forces.

What are Porter's 5 forces?

Porter's 5 forces is a model of analysis of competitive market forces, developed by the eminent and renowned American economist Michael Porter.

This system became known as a result of the publication of the book Competitive Strategy, in 1980, which proposes an analysis of industrial markets and the characteristics of the competitive struggle, as well as techniques for its practical application.

The framework developed by Porter, to assess the attractiveness of a business sector, identifies 5 sources of competitive pressure that determine the profitability of a sector: the threat of possible new entrants, the threat of substitution, the intensity of the rivalry between competitors, bargaining power of suppliers and bargaining power of buyers.

The 5 identified forces have a clear influence on costs, prices, and investment needs since they are essential elements to determine the profitability of a sector and its attractiveness. Porter's model identifies some key players (competitors, buyers, suppliers, potential new entrants, and substitutes), the interrelationships of these key players (the 5 forces), and the factors that determine the intensity of these forces.

Porter's 5 forces

The best way to graph the 5 forces of the Porter model is through an image of it:

Potential Tickets

The attractive sectors formed by companies that have striking profitability act as a hook for many organizations to see these businesses as new and good opportunities. The emergence of new entrants, however, is taken as bad news for companies already established in the sector.

Potential new business entries can take different forms: a new entrant can be a company that did not exist before; an existing one that diversifies its activities or one that expands its operations to new geographic areas.

Theoretically, any entity could enter or leave a market, however, the different sectors protect the companies established in it and seek to inhibit the entry of new rivals by placing barriers to entry.

Some of these entry barriers include economies of scale, product differentiation, capital requirements, government policies, and access to distribution channels.

Competitors

The competition between entities that are part of a certain sector determines the level of profitability of that sector and the general status of competitiveness.

The intensity of industry rivalry between firms can vary significantly from industry to industry, with qualifiers such as “fierce”, “intense”, “moderate” or “weak” often being used to identify competitive clashes.

Among some of the factors that must be taken into account for the analysis of this force, the following can be identified:

• Concentration or fragmentation of the sector.
• Market growth.
• High fixed costs.
• Low degree of product differentiation.
• Strategic game.
• Exit barriers, such as specialized assets or sociopolitical restrictions.

substitutes

Substitutes are those products from other sectors that can perform the same function as those of the sector under analysis. Substitute products essentially satisfy the needs of customers, therefore the companies that offer them are potential competitors and have to be seen as a threat to the organizations that make the original product.

The availability of related substitutes can put pressure on the industry to keep prices competitive, thus limiting the industry's profitability. The impact of substitutes on the profitability of a sector can be influenced by various factors, such as:

• The relative performance of substitutes with respect to price.
• The costs of the change for the buyer.
• The buyer's propensity to switch.

providers

Companies in the industry buy and sell products and services to suppliers for production, trying to exert their power and influence to obtain the best prices, the highest possible quality, and the highest level of service, all of which have an impact on the level of profitability. of the sector.  

Suppliers in an industry will be powerful if:

• They are concentrated, that is, there are few providers with a significant market share.
• They supply vital components for production.
• They supply exclusive or differentiated components, whose costs to change supplier would be onerous.
• Possess a credible threat of forwarding integration.

buyers

The bargaining power of the buyers, that is, of the clients, will be greater the more organized and cohesive the consumers are, which will mean that they can demand more and better commercial conditions.

The improvement of supply and demand in the market largely depends on this force, and its influence is not only on the sellers but also on the demand that there may be for the products.

Buyers in an industry will be powerful if:

• They are concentrated, that is, there are few with a significant market share.
• They buy a significant portion of the supplier's output.
• They buy a standard product, or the costs to switch providers are low.
• There is a credible danger of backward integration and they may threaten to buy the supplier company from a rival.

Porter's 5 Forces Analysis Example

Below we propose an example within the mobile phone sector, in which Porter's 5 forces are analyzed:

• Potential entries: in this era of global hyperconnection, the cell phone niche is extremely attractive, and of course, the sector is a magnet for a good number of companies to want to position themselves in this market, mainly companies already that aspire to encompass new geographical areas.
• Competitors: here the fight between competitors is very tough, with the battle taking place in multiple facets of the business such as prices, advertising, quality, and innovation, among others.
• Substitutes: Regarding substitute products, although they exist, as competitive forces settle in the dynamic area of ​​technology, personal mobile communication equipment, at least for the moment, seems to reign.
• Suppliers: regarding suppliers, because the technology sector is so dynamic and constantly evolving, constant improvements must be made to the products offered so that they are not left behind.
• Buyers: mobile buyers have a significant power of influence since the number of users and potential customers of mobile phones are represented by a huge number of millions of people around the planet. In this context, the premise "the customer is right" is applicable in all its dimensions.

 

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