PORTER’S FIVE FORCES OF

COMPETITIVE POSITION
ANALYSIS
Prepared by: Joysam L. Dumaplin
PORTER’S FIVE FORCES OF
COMPETITIVE POSITION ANALYSIS
Another analytical tool that can be used to assess business is Porter’s Five
Forces of Competitive Position Analysis. It was developed in 1979 by Michael E.
Porter of Harvard Business School as a framework or a guide for assessing and
evaluating the competitive strength and position of a business organization.
Under Porter’s theory, he identifies five forces that determine the
competitiveness and attractiveness of a market and which seek to locate the
power in a business situation, as current competitive position, and the strength
of a position that an organization may enter into. These five forces help in
identifying if new products or services are potentially profitable. Once the area
where power lies is identified, then areas of strength can be pinpointed and
exploited, solutions to weaknesses may be proposed, and possible mistakes
avoided.
 Threat of
new entrants

Bargaining Rivalry among Bargaining

power of existing power of
suppliers competitors buyers

Threat of substitute
products or services

Figure 3.2. Porter’s Five Forces of Competitive Position Analysis

Five forces that need to be evaluated:
1. Supplier power- It is important to assess how much power the supplier than in his ability to drive
up prices. A supplier enjoys this power if there are few suppliers of an essential input and they
therefore control the supply of that input. Another source of power is how unique the product or
service is. The more unique the product, the easier who has a relatively bigger size and strength in
the market enjoys the power of driving up prices.
2. Buyer power- If a supplier can enjoy the power to drive prices up, it is also possible for a buyer to
drive prices down. An assessment needs to be made on of how easy it is for buyers to drive prices
down. The smaller the number of buyers in the market, the greater is the power enjoyed the buyer.
3. Number of competitors- The number and capability of competitors in the market will also
impact on the attractiveness of the market. If competitors are numerous offer basically similar
products and services, the market will be less attractive. Low capability of competitors to meet the
market’s current needs will serve as an attractive opportunity for the firm.
4. Possibility of substitution- When it is easy to substitute products in a market, it is expected
that buyers will switch to alternatives in case of price increases. The suppliers will enjoy less power
to drive prices up and the market will be less attractive.
5. Possibility of new entrants- When investors see that a market is profitable, they will desire to
join the bandwagon and get a share of the profits. But when new investors enter a market, the
share of the participants in the market will be divided among more people and will therefore
decline, thus, eroding profits. However, if barriers to entry prevent new participants from entering
the market, profits will be maintained among the existing participants.
IMPORTANCE OF PORTER’S FIVE FORCES
ANALYSIS
The Porter’s Five Forces Analysis is a significant tool for organizations to
understand the factors affecting profitability in a specific industry and can
help to form decisions on whether or not to enter a specific industry,
whether or not to increase capacity in a specific industry, and also for
developing competitive strategies.
Under this theory, a business becomes more attractive, the greater
the supplier’s power to drive prices up, the less the buyer’s power to drive
prices down, the less the number of competitors in the market, the more
differentiated the product or service is, the less the substitutability of the
products for similar goods, and the more difficult it is for new entrants to
participate in the market. (Chartered Global Management Accountant 2015)