MICHAEL PORTER’S

FIVE-FORCE STRATEGY
 MICHAEL PORTER
 Professor Porter was born in Ann
Arbor, Michigan.
 He received an M.B.A. with high
distinction in 1971 from the Harvard
Business School, where he was a
George F. Baker Scholar, and a Ph.D. in
Business Economics from Harvard
University in 1973.
 Professor Porter has served as a
strategy advisor to top management in
numerous leading U.S. and international
companies
 He has also been an advisor to
Government
 Michael E. Porter is the Bishop William
Lawrence University Professor, based
at Harvard Business School and also
the Director of Institute for Strategy
and Competitiveness.
 The Five Forces Model of Porter is an
Outside-in business unit strategy tool that
is used to make an analysis of the
attractiveness (value) of an industry
structure.
The Model of the Five Competitive Forces
 Bargaining Power of Suppliers

 The market is dominated by a few large suppliers

 No substitutes for the particular input
 The suppliers customers are fragmented, so their bargaining
power is low
 The switching costs from one supplier to another are high
 Supplier integrating forward
 The buying industry has a higher profitability than the supplying
industry
 The buying industry hinders the supplying industry in their
development
 The buying industry has low barriers to entry.
Reducing the Bargaining Power
of Suppliers

 Take over a supplier

 Partnering
 Supply chain management
 Supply chain training
 Increase dependency
 Build knowledge of supplier costs and
methods
 Bargaining Power of Customers

 Large volumes
 Supplying industry comprises a large number of small
operators
 High fixed costs
 Product is undifferentiated and can be replaces by substitutes
 Switching to an alternative product
 Customers have low margins and are price-sensitive
 Customers could produce the product themselves
 The product is not of strategically importance for the
customer
 The customer knows about the production costs of the product
 There is the possibility for the customer integrating
backwards.
Reducing the Bargaining Power of
Customers

 Partnering
 Supply chain management
 Increase loyalty
 Increase incentives and value added
 Move purchase decision away from price
 Cut put powerful intermediaries (go directly
to customer)
Threat of New Entrants
 Economies of scale
 High initial investments and fixed costs
 Cost advantages of existing players due to experience
 Brand loyalty of customers
 Protected intellectual property like patents, licenses etc
 Scarcity of important resources
 Access to raw materials is controlled by existing players
 Distribution channels are controlled by existing players
 Existing players have close customer relations
 High switching costs for customers
 Legislation and government action
Reducing the Threat of New Entrants

Increase minimum efficient scales of operations

 Create a marketing / brand image
 Patents, protection of intellectual property
 Alliances with linked products / services
 Tie up with suppliers
 Tie up with distributors
 Retaliation tactics
Threat of Substitutes

 Brand loyalty of customers

 Close customer relationships
 Switching costs for customers
 The relative price for performance of
substitutes
 Current trends
Reducing the Threat of Substitutes

 Legal actions
 Increase switching costs
 Alliances
 Customer surveys to learn about their
preferences
 Enter substitute market and influence
from within
 Accentuate differences (real or
perceived)
 Competitive Rivalry between
Existing Players

 Many players
 Players have similar strategies
 No differentiation between players and
their products
 Low market growth rates
 Barriers for exit are high
Reducing the Competitive Rivalry
between Existing Players

 Avoid price competition

 Differentiate your product
 Buy out competition
 Reduce industry over-capacity
 Focus on different segments
 Communicate with competitors
Why Is Michael
Porter’s model
used?
 Statistical Analysis

 Attractiveness of an industry

 Insights on profitability

 Decisions about entry or exit

 Compare the impact of competitive forces 

 Dynamical Analysis

 Political changes

 Economical changes

 Socio-demographical changes

 Technological changes
 Awareness of competitive forces
can help a company stake out a
position in its industry that is less
vulnerable to attack.

Michael E. Porter
Competitive Strategy
 Advantages
 Provides an understanding of the structure of
an industry’s business environment.
 The model takes a broader view on
competition than only a firm's existing
competing firms.
 The business unit level provides a context
beyond a single product or range of products.
 Sometimes it may be possible to create
completely new markets instead of selecting
from existing ones (Blue-Ocean Strategy)
 Limitations
 The analysis does not include perspectives such as
the resource based view in which organisations can
reshape an industry based on existing core
competences and intrinsic will power.
 The analysis is based on the assumption that firms
strive only for a competitive advantage over their
rivals and exclude other motivations.
 Buyers, suppliers and (new) competitors are
assumed unrelated and do not operate in networks
outside of the industry under observation
 Information Era
 Societal, technological and cultural changes
 Downes’ Three New Forces

 Digitalization

 Globalization

 Deregulation
 Porter’s Five Forces Model
Applied to the Indian Pharma
Industry
 Pharma Industry
High Moderate Low

Barriers to Entry

Bargaining Power of
Buyers

Bargaining Power of
Suppliers

Threat of Substitutes

Intensity of Rivalry
Between Firms
 Pharma Industry
High Moderate Low

Barriers to Entry

Bargaining Power of
Buyers

Bargaining Power of
Suppliers

Threat of Substitutes

Intensity of Rivalry
Between Firms
Porter’s Five Forces Model
Applied to Coco Cola
 Coco Cola
CocoCola, one of the most valuable brands in the world ($67.5
billion), had faced a slump period characterized by declining
demand on their “flagship” product Coke, which resulted in a
huge drop in sales.
What led to that fallback is a sequential of events including
increased health awareness among developed countries, where
Coke was very slow to acknowledge. That put its rivals, like
Pepsi, ahead in introducing healthy beverages among its
product line. Another reason could be the emergence of the
energy drinks niche by new beverage producers.
It’s later that CocoCola realized that, and in regard to the
change in consumers health concerns, it followed by
introducing a wide range of non-carbonated products and
bottled water. Another step was to increase their advertising
and marketing campaigns. CocoCola also intensified their
activities in the Asian markets where they had the largest
slice of market share among its competitors.
We could analyze Cola’s stand in this case against Porter’s
five-force model.
 Coco Cola
High Moderate Low

Barriers to Entry

Bargaining Power of
Buyers

Bargaining Power of
Suppliers

Threat of Substitutes

Intensity of Rivalry
Between Firms
 Coco Cola
High Moderate Low

Barriers to Entry

Bargaining Power of
Buyers

Bargaining Power of
Suppliers

Threat of Substitutes

Intensity of Rivalry
Between Firms