The Five Competitive Forces That Shape Strategy
Porter’s 5-forces
Porter’s 5-forces model is based on fie possible
threats from the industry:
1. Established riials
2. Customers
3. Suppliers
4. Entrants
5. Substtute oferings
Reshape the forces in your faiour:
To neutralize supplier power, standardize your
parts so you can switch easily between iendors
To counter customer power, expand your
seriices so it’s harder for customers to leaie
To weaken the power of riials, iniest in products that difer signifcantly
To scare of new entrants, eleiate the fxed costs of competng
To limit threat of substtutes, ofer beter ialue through wider product accessibility
Threat of entry
New entrants mostly haie a desire to gain market share. If they come from another market the can
leierage existng resources.
When the treat of new entrants is high, compettors must keep their prices low and boost iniestment
The threat of entry depends height of entry barriers:
Supply-side economies of scale: Firms produce at larger iolumes so they enjoy lower costs
per unit because they can spread fxed costs. This forces new entrants to come in at high
iolume
Demand-side benefts of scale: Buyers willingness to pay may be afected by the established
name of a company (No-one eier got fred for buying an IBM computer)
Customer switching costs: If the costs for switching to another iendor are high, customers
are more likely to stay with the company they are already in business with
Capital requirements: If iniestment costs are high new entrants might be scared of, but if the
market has atractie returns iniestors are likely to iniest in new start-ups to help them
oiercome this barrier
Incumbency adiantages independent of size: Incumbents may haie cost and quality
adiantages (brand name, locaton, best raw material sources, etcetera)
Unequal access to distributon channels: New entrants haie to fght the existng products
that are already ‘’on the shelies’’. The more limited the retail channels are, the more that
existng compettors haie ted them up, the tougher entry to an industry will be
Restrictie goiernment policy: This can heighten entry barriers through such means as
expansiie patentng rules that protect proprietary technology from imitatng or
eniironmental or safety regulatons that raise scale economies facing newcomers
Porter’s 5-forces
Porter’s 5-forces model is based on fie possible
threats from the industry:
1. Established riials
2. Customers
3. Suppliers
4. Entrants
5. Substtute oferings
Reshape the forces in your faiour:
To neutralize supplier power, standardize your
parts so you can switch easily between iendors
To counter customer power, expand your
seriices so it’s harder for customers to leaie
To weaken the power of riials, iniest in products that difer signifcantly
To scare of new entrants, eleiate the fxed costs of competng
To limit threat of substtutes, ofer beter ialue through wider product accessibility
Threat of entry
New entrants mostly haie a desire to gain market share. If they come from another market the can
leierage existng resources.
When the treat of new entrants is high, compettors must keep their prices low and boost iniestment
The threat of entry depends height of entry barriers:
Supply-side economies of scale: Firms produce at larger iolumes so they enjoy lower costs
per unit because they can spread fxed costs. This forces new entrants to come in at high
iolume
Demand-side benefts of scale: Buyers willingness to pay may be afected by the established
name of a company (No-one eier got fred for buying an IBM computer)
Customer switching costs: If the costs for switching to another iendor are high, customers
are more likely to stay with the company they are already in business with
Capital requirements: If iniestment costs are high new entrants might be scared of, but if the
market has atractie returns iniestors are likely to iniest in new start-ups to help them
oiercome this barrier
Incumbency adiantages independent of size: Incumbents may haie cost and quality
adiantages (brand name, locaton, best raw material sources, etcetera)
Unequal access to distributon channels: New entrants haie to fght the existng products
that are already ‘’on the shelies’’. The more limited the retail channels are, the more that
existng compettors haie ted them up, the tougher entry to an industry will be
Restrictie goiernment policy: This can heighten entry barriers through such means as
expansiie patentng rules that protect proprietary technology from imitatng or
eniironmental or safety regulatons that raise scale economies facing newcomers
