Porter's 5 forces plus 1

Porter's Five Forces is a framework for analyzing the competitive environment of an industry. It was developed by Harvard Business School professor Michael E. Porter in 1979 and has since become an important tool for managers.

Porter's Five Forces framework The five forces are:

​Threat of new entrants: This is the threat of new companies entering the industry. New entrants can bring new capacity, new technologies, and new ideas, which can put downward pressure on prices and profits for existing companies.

​Bargaining power of suppliers: This is the power that suppliers have to influence the prices and terms of trade. Suppliers can have high bargaining power if there are a few large suppliers, if the products they supply are unique or difficult to substitute, or if the cost of switching to a different supplier is high.

​Bargaining power of buyers: This is the power that buyers have to influence the prices and terms of trade. Buyers can have high bargaining power if there are a few large buyers, if the products they buy are standardized and easy to substitute, or if the cost of switching to a different supplier is low.

​Threat of substitutes: This is the threat of existing products or services being replaced by new ones. The threat of substitutes is high if there are close substitutes available, if the cost of switching to a substitute is low, or if the performance of the substitute is superior.

​Competitive rivalry: This is the intensity of competition among existing companies in the industry. Competitive rivalry is high if there are many competitors, if the products are differentiated, or if the exit barriers from the industry are high.

There is an additional force considered

"Porter’s Sixth Force Definition

Complementors, Porter’s sixth force, are companies or entities that sell or offer goods or services that are compatible with, or complementary to, the goods or services produced and sold in a given industry. Complementary goods offer more value to the consumer together than apart. When one product or service complements another there exists a condition called complementarity; a sort of commercial symbiosis. Complementors are often considered the sixth force of Porter’s industry analysis framework. The presence of Porter’s complementors can influence the competitive structure of an industry." strategiccfo.com

How to use Porter's Five Forces To use Porter's Five Forces, businesses should assess each of the five forces and identify the strengths and weaknesses of their business in relation to each force. This information can then be used to develop strategies to mitigate the negative impacts of the forces and capitalize on the positive impacts.

For example, if a business faces a high threat of new entrants, it may develop strategies such as product differentiation, brand building, or high entry barriers. If a business faces a high bargaining power of buyers, it may develop strategies such as product differentiation, supplier integration, or customer switching costs. Example Here is an example of how a business might use Porter's Five Forces to analyze its competitive environment: Industry: Smartphone industry

​Threat of new entrants: High There are low barriers to entry, as the technology is relatively easy to understand and the capital requirements are not high. There are a number of established companies in the industry with strong brands and customer loyalty.

​Bargaining power of suppliers: Medium There are a few large suppliers of smartphone components, such as Qualcomm and Samsung. The products they supply are essential for smartphone manufacturers, and there are few close substitutes. The cost of switching to a different supplier is high, due to the need to redesign products and re-qualify suppliers.

​Bargaining power of buyers: Medium There are many smartphone buyers, and the products are relatively standardized. The cost of switching to a different smartphone is low. Buyers have some bargaining power, as they can choose to buy from a different manufacturer or delay their purchase.

​Threat of substitutes: High There are a number of close substitutes for smartphones, such as feature phones and tablets. The cost of switching to a substitute is low. The performance of substitutes is improving all the time.

​Competitive rivalry: High There are a number of large smartphone manufacturers, such as Apple, Samsung, and Huawei. The products are differentiated by features, branding, and price. The exit barriers from the industry are high, due to the large investments required in research and development and manufacturing.

Strategies Based on this assessment, the smartphone industry business could develop the following strategies:

• To mitigate the threat of new entrants, the business could focus on product differentiation, brand building, and high entry barriers.

• To mitigate the bargaining power of suppliers, the business could develop supplier relationships, integrate with suppliers, or develop alternative sources of supply.

• To mitigate the bargaining power of buyers, the business could focus on product differentiation, customer service, and switching costs.

• To mitigate the threat of substitutes, the business could focus on product innovation, product bundling, and customer switching costs.

• To compete effectively with other smartphone manufacturers, the business could focus on product differentiation, brand building, and cost control.

Industry: Airline industry

​Threat of new entrants: Medium The barriers to entry are moderately high, due to the need for large capital investments, regulatory approval, and brand recognition. However, new entrants can be successful by focusing on niche markets or by offering lower-cost fares.

​Bargaining power of suppliers: Medium The main suppliers to the airline industry are aircraft manufacturers and fuel suppliers. Aircraft manufacturers have a high degree of bargaining power, due to the high cost of aircraft and the long lead times for delivery. Fuel suppliers have a lower degree of bargaining power, due to the availability of multiple suppliers and the ability of airlines to switch suppliers.

​Bargaining power of buyers: High There are a large number of buyers of airline tickets, and the products are relatively standardized. Buyers have high bargaining power, as they can choose to fly with a different airline or delay their purchase.

​Threat of substitutes: High There are a number of close substitutes for air travel, such as trains, buses, and cars. The cost of switching to a substitute is relatively low. The performance of substitutes is improving all the time.

​Competitive rivalry: High There are a number of large airlines, both traditional and budget carriers. The products are differentiated by features, pricing, and routes. The exit barriers from the industry are relatively high, due to the large investments required in aircraft and infrastructure.

Strategies

Based on this assessment, airlines could develop the following strategies:

• To mitigate the threat of new entrants, airlines could focus on brand building, customer loyalty programs, and cost control.

• To mitigate the bargaining power of suppliers, airlines could develop relationships with suppliers, negotiate long-term contracts, and hedge fuel costs.

• To mitigate the bargaining power of buyers, airlines could focus on product differentiation, customer service, and loyalty programs.

• To mitigate the threat of substitutes, airlines could offer a variety of fare options, develop new routes, and partner with other transportation providers.

• To compete effectively with other airlines, airlines could focus on product differentiation, cost control, and network efficiency.

Porter's Five Forces is a powerful tool that can help businesses to understand their competitive

Sash Barige

Nov/19/2017

References:

Porter, M. E. (1979). How competitive forces shape strategy. Harvard Business Review

Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard Business Review

https://www.business-to-you.com/porters-five-forces/

https://strategiccfo.com/articles/accounting/complementors-sixth-force-of-porters-five-forces/#:~:text=Complementors%2C%20Porter's%20sixth%20force%2C%20are,sold%20in%20a%20given%20industry.