Michael Porter

1. Porter's Five Forces offer businesses a way to analyze and
outmaneuver their competitors in the marketplace.
Knowing who your competition is and how their products, services, and marketing strategies
affect you is critical to your survival. Whether you are a Fortune 500 company or a small, local
business, competition has a direct influence on your success.
Understanding Porter‘s Five Forces
Porter theorized that understanding both the competitive forces at play and the overall industry
structure are crucial for effective, strategic decision-making, and developing a compelling
competitive strategy for the future.
In Porter’s model, the five forces that shape industry competition are
1. Competitive rivalry
This force examines how intense the competition is in the marketplace. It considers the number
of existing competitors and what each one can do. Rivalry competition is high when there are
just a few businesses selling a product or service, when the industry is growing and when
consumers can easily switch to a competitor’s offering for little cost. When rivalry competition
is high, advertising and price wars ensue, which can hurt a business’s bottom line.
2. The bargaining power of suppliers
This force analyzes how much power a business’s supplier has and how much control it has
over the potential to raise its prices, which, in turn, lowers a business’s profitability. It also
assesses the number of suppliers of raw materials and other resources that are available. The
fewer supplier there are, the more power they have. Businesses are in a better position when
there are multiple suppliers. Learn more about finding suppliers and B2B partners.
3. The bargaining power of customers
This force examines the power of the consumer, and their effect on pricing and quality.
Consumers have power when they are fewer in number but there are plentiful sellers and it’s
easy for consumers to switch. Conversely, buying power is low when consumers purchase
products in small amounts and the seller’s product is very different from that of its competitors.
4. The threat of new entrants
This force considers how easy or difficult it is for competitors to join the marketplace. The
easier it is for a new competitor to gain entry, the greater the risk is of an established business’s
market share being depleted. Barriers to entry include absolute cost advantages, access to
inputs, economies of scale, and strong brand identity.
5. The threat of substitute products or services
This force studies how easy it is for consumers to switch from a business’s product or service
to that of a competitor. It examines the number of competitors, how their prices and quality

2. compare to the business being examined, and how much of a profit those competitors are
earning, which would determine if they can lower their costs even more. The threat of
substitutes is informed by switching costs, both immediate and long-term, as well as
consumers’ inclination to change. Learn how to perform a competitive analysis to stay ahead
of other players in the market. To take full advantage of this strategy make sure you’re able to
properly calculate cost of goods sold (COGS).
Example of Porter’s Five Forces
There are several examples of how Porter’s Five Forces can be applied to various industries.
The ultimate goal is to identify the opportunities and threats that could impact a business. As
an example, stock analysis firm Trefis looked at how Under Armour fits into the athletic
footwear and apparel industry.
 Competitive rivalry: Under Armour faces intense competition from Nike, Adidas, and
newer players. Nike and Adidas, which have considerably larger resources at their
disposal, are making a play within the performance apparel market to gain market share
in this up-and-coming product category. Under Armour does not hold any fabric or
process patents, hence its product portfolio could be copied in the future.
 Bargaining power of suppliers: A diverse supplier base limits supplier bargaining
power. Under Armour’s products are produced by dozens of manufacturers based in
multiple countries. This provides an advantage to Under Armour by diminishing
suppliers’ leverage.
 Bargaining power of customers: Under Armour’s customers include wholesale
customers and end-user customers. Wholesale customers, like Dick’s Sporting Goods,
hold a certain degree of bargaining leverage, as they could substitute Under Armour’s
products with those of Under Armour’s competitors to gain higher margins. The
bargaining power of end-user customers is lower as Under Armour enjoys strong brand
recognition.
 Threat of new entrants: Large capital costs are required for branding, advertising, and
creating product demand, which limits the entry of newer players in the sports apparel
market. However, existing companies in the sports apparel industry could enter the
performance apparel market in the future.
 Threat of substitute products: The demand for performance apparel, sports footwear
and accessories is expected to continue to grow. Therefore, this force does not threaten
Under Armour in the foreseeable future.
What is a PESTEL Analysis?
A PESTEL analysis is a strategic framework commonly used to evaluate the business
environment in which a firm operates. Traditionally, the framework was referred to as a PEST
analysis, which was an acronym for Political, Economic, Social, and Technological; in more
recent history, the framework was extended to include Environmental and Legal factors as
well.

3. The framework is used by management teams and boards in their strategic planning processes
and enterprise risk management planning. PESTEL analysis is also a very popular tool among
management consultants to help their clients develop innovative product and market initiatives,
as well as within the financial analyst community, where factors may influence model
assumptions and financing decisions.
Key points from a PESTEL analysis can be incorporated into other industry and firm-level
frameworks, such as Ansoff’s Matrix, Porter’s 5 Forces, and SWOT Analysis.
Political Factors
Broadly speaking, political factors are those driven by government actions and policies. They
include, but are not limited to, considerations like:
 Corporate taxation
 Other fiscal policy initiatives
 Free trade disputes
 Antitrust and other anti-competition issues
It’s worth noting that even the overhang of potential trade disputes or antitrust issues can
present material risks and opportunities for management teams. Divergent stances on key
platform issues between parties on the left and the right can also make run-ups to elections
particularly challenging for a firm’s management team, as the range of possible outcomes can
vary considerably depending on election results.
Political Factor Example: A multinational company closes several facilities in a higher tax
jurisdiction in order to relocate operations somewhere with lower tax rates and/or greater state
funding and grant opportunities.
Economic Factors
Economic factors relate to the broader economy and tend to be expressly financial in nature.
They include:

4.  Interest rates
 Employment rates
 Inflation
 Exchange rates
Many analysts in the financial services sector tend to overweight economic factors in their
analysis, since they’re more easily quantified and modelled than some of the other factors in
this framework (which are somewhat qualitative in nature).
Economic Factor Example: Based on where we are in the economic cycle and what Treasury
yields are doing, an equity research analyst may adjust the discount rate in their model
assumptions; it can have a material impact on the valuations of the companies they cover.
Social Factors
Social factors tend to be more difficult to quantify than economic ones. They refer to shifts or
evolutions in the ways that stakeholders approach life and leisure, which in turn can impact
commercial activity. Examples of social factors include:
 Demographic considerations
 Lifestyle trends
 Consumer beliefs
 Attitudes around working conditions
Social factors may seem like a small consideration, relative to more tangible things like interest
rates or corporate taxation. Still, they can have a shockingly outsized impact on entire industries
as we know them. Consider how trends towards healthier and more active lifestyles have
ushered in the evolution of connected fitness technologies, as well as many changes to the
nature of food products we consume and how these food products are packaged and marketed.
Social Factor Example: Post-pandemic, management at a technology firm has had to
seriously re-evaluate hiring, onboarding, and training practices after an overwhelming number
of employees indicated a preference for a hybrid, work-from-home (WFH)model.
Technological Factors
In today’s business landscape, technology is everywhere – and it’s changing rapidly.
Management teams and analysts alike must understand how technological factors may impact
an organization or an industry. They include, but are not limited to:
 Automation
 How research and development (R&D) may impact both costs and competitive
advantage
 Technology infrastructure (like 5G, IoT, etc.)
 Cyber security
The speed and scale of technological disruption in the present business environment are
unprecedented, and it has had a devastating impact on many traditional businesses and sectors
– think Uber upending the transportation industry or the advent of e-commerce revolutionizing
retail trade as we know it.
Technological Factor Example: A management team must weigh the practical and the
financial implications of transitioning from on-site physical servers to a cloud-based data
storage solution.

5. Legal Factors
Legal factors are those that emerge from changes to the regulatory environment, which may
affect the broader economy, certain industries, or even individual businesses within a specific
sector. They include, but are not limited to:
 Industry regulation
 Licenses and permits required to operate
 Employment and consumer protection laws
 Protection of IP (Intellectual Property)
Regulation can serve as a headwind or a tailwind for operators. An example headwind might
be increased capital requirements for financial institutions; an example tailwind is if regulation
is so heavy in a particular industry (let’s say food production) that it may serve as a protective
moat for established operators, creating an additional barrier preventing potential new entrants.
Example Legal Factors: A rating agency is assessing the creditworthiness of a technology
firm that has considerable growth prospects in emerging markets. The analyst must weigh this
growth trajectory against the inherent risk of IP theft in some of those jurisdictions where legal
infrastructure is weak. IP theft can severely undermine a firm’s competitive advantage.
Environmental Factors
Environmental factors emerged as a sensible addition to the original PEST framework as the
business community began to recognize that changes to our physical environment can present
material risks and opportunities for organizations. Examples of environmental considerations
are:
 Carbon footprint
 Climate change impacts, including physical and transition risks
 Increased incidences of extreme weather events
 Stewardship of natural resources (like fresh water)
Environmental factors in a PESTEL analysis will overlap considerably with those typically
identified in an ESG (Environmental, Social, and Governance) analysis. In fact, it’s widely
believed that the addition of environmental factors to the PESTEL framework evolved from
the growing popularity of movements such as CSR(Corporate Social Responsibility) and ESG.
Environmental Factor Example: Management at a publicly traded firm must re-evaluate
internal record keeping and reporting tools in order to track greenhouse gas emissions after the
stock exchange announced mandatory climate and ESG disclosure for all listed companies.