porters five forces, advantages and its limitation. features of attractive and unattractive competitive enviroment, cirmustances that couses higher supplier and customer bargaining power,

1. PORTER’S FIVE FORCE MODEL
CONTENTS
The meaning of Michel porter’s five force model
1. Threat of potential new entrants
1.1Sources of entity barriers
2. Bargaining power of buyers
2.1 circumstances that make buyers strong/when does customer bargaining power become high?
2.2. How to reduce the bargaining power of buyers
3. Bargaining power of supplier
3.1 circumstances /situation that make suppliers to have strong bargaining power
4. Threat of substitute products
4.1 Conditions of substitute products
5. Rivalry among competitors
5.1. Factors for intensive rivalry
5.2 How to deal with intense competition
6. Features of attractive and unattractive competitive environment
7. Advantages and limitation of porter’s five forces

2. MICHAEL PORTER’S FIVE FORCE MODEL
According to porter, the nature of competiveness in a given industry can be viewed as a
composite of five forces. Each of these forces affects firm’s ability to compete in a market.
DEFINITION
The five force model developed by Michael porter is a tool that helps in analyzing the
attractiveness of an industry; it is used for analyzing competitive environment in terms of five
basic competitive forces.
These forces determine the intensity of competition and hence the profitability and attractiveness
of an industry can be evaluated. They impact on company’s ability to compete in a given market.
Porter’s five forces are as follows

3. 1. THREAT OF NEW ENTRANTS
This is the likelihood that the new entrants will enter into the same business that the firm
operates on. It refers to the possibility that the profits of established firm may be ended by new
competitors.
New entrants to the business can raise the competition level, the threat of new entrants depends
on the barriers to entry, and if barriers are high the threat is low.
SOURCES OF ENTITY BARRIERS
A. Economies of scale
An organization that has achieved economies of scale is the one that produces very large number
of products at low cost per unit. It is harder for a new firm to launch in the industry where it will
never gain economies of scale since that it will never be able to sell its products on competitive
price.
B. Product differentiation
How is the product different from competitors?
- Strong brand
- Customer loyalty
- Identification
C. Capital requirements
If the investment requirement is high (amount of capital to fund the business) it will create
barrier to an entry, if the capital requirement is low then there won’t be much of a barrier.
D. Customer switching cost
Switching costs are the costs associated with changing from one product/service to another. It is
a control mechanism that can be used as an entry barrier.
Switching cost may include search cost, learning costs, equipments costs, and installation costs
and start up costs, exit fees. Etc
Examples: cost informing relatives upon changing a mobile operator, cost of learning and
equipment installation upon changing manufacturing machines.

4. E. Access to distribution networks
New entrant need to secure distribution network for its products. If access is hard to obtain then
it can create and entry barrier. Example, access of raw materials is controlled by existing
business.
F. Government legislation
G. Expected retaliation
Note!!!
The above (source of entity barriers) are used by existing firms to control rival entrance on their
business
2. BARGAINING POWER OF BUYERS/CUSTOMERS
Bargaining power of buyers determines how much customers can impose pressure on the
organization. Buyers compete with the supplying industry by bargaining down prices, forcing
higher qualities
Bargaining power of buyers can influence over the organization to shape their price, quality of
product and distribution channel
Note!!!
The more powerful the customers are, the less profitable the organization will be
CIRMUSTANCES THAT MAKE BUYERS STRONG/HOW CUSTOMERS GAIN HIGHER
BARGAINING POWER?
Customer bargaining power is likely to be high due to the following reasons
A. When they purchase the product in large volumes
B. When buyers have better information level they are capable of bargaining with
suppliers/manufacturer. Example, when customers know about the production costs they may
negotiate for lower cost or price.
C. Standard/undifferentiated
If the product offered is not unique, same as other entity, customers may opt for another
supplier/manufacturer
D. When buyers face few switching cost

5. E. When buyers are aware of product quality provided by supplier and its competition, they are
in better position to bargain the price.
HOW TO REDUCE THREATS POSSED BY BARGAINING POWER OF BUYERS
i. Products that are well differentiated.
ii. Products that are of superior quality compared to competitor products
iii. High market share
3. BARGAINING POWER OF SUPPLIERS
The term supplier comprises of all sources of inputs that are needed in order to provide goods or
services.
The cost of items bought from one supplier (e.g., raw materials and machine components) can
have significant impact on company’s profitability.
If suppliers have high bargaining power over a company, then the industry will be less attractive
CIRCUMSTANCES/SITUATIONS THAT MAKES SUPPLIERS TO HAVE STRONG
BARGAINING POWER
Suppliers bargaining power is likely to be high due to the following.
i. If supplier’s product have no substitute or fewer substitutes
ii. If supplier’s product have high switching cost
iii. If supplier’s industry is dominated by few firms
iv. If the product of supplier is unique/differentiated
v. If the supplier’s product is an important input to buyer’s product
vi. If the buyer is not an important customer to supplier

6. 4. THREAT OF SUBSTITUTE PRODUCT
The presence of substitute product that performs similar function as the one provided by the
company can result to lower profitability because they limit price level and reduce demand for a
particular class of products.
A threat of substitute products may exist if there are alternative products with lower prices, better
performance and performs the same function as the one served by current company.
In general if there is higher probability of existence of substitute products or if there are
substitute product available then the industry will be less attractive
CONDITIONS FOR SUBSTITUTE PRODUCTS
The threat of substitute products depends on the following
i. The cost of switching to substitute
ii. The relative price and performance of substitutes
iii. Close customer relationships ( affect buyer’s willingness to substitute)
iv. Current trends
5. RIVALRY AMONG COMPETITORS (INDUSTRY RIVALRY)
This refers to the intensity of competition among the existing competitors. What is important
here is the number and capability of competitors.
If a firm has many competitors and they offer equally attractive products and services, then the
firm is likely to have little power in competitive environment.
FACTORS FOR INTENSE RIVALRY (COMPETITON)
Competition between existing players is likely to be high due to the following
i. The competitors are in balance. I.e. they have the same size and capability
ii. When the product lacks differentiation, one can switch from one product to another.
iii. When competitors have similar strategies based on pricing, product innovation and
promotion
iv. When competing organization compete in a mature market
v. When several competitors are trying for the same end results. E.g., diverse sales and
increasing market share.

7. HOW TO DEAL WITH INTENSE COMPETITION
I. Strengthen entity brand through innovation, differentiation
II. Increasing consumer warranties or services
III. Conducting the business in transparent, ethical and socially responsible manners. This
would ensure support form stakeholders.
IV. Increasing market knowledge through market research
V. Using price competition
FEATURES OF UNATTRACTIVE COMPETITIVE ENVIROMENT
I. rivalry is vigorous
II. Entry barriers are low and entity is likely to enter
III. Competition from substitute is strong
IV. Suppliers and customers have considerable bargaining power
FEATURES OF ATTRACTIVE COMPETITIVE ENVIROMENT
I. Entry barriers are high
II. There is low competition from substitute.
III. Suppliers and customers do have lower bargaining power
In general porter’s five force model helps to understand the strengths of the firm’s current
competitive position and the strengths of the position the firm aims to move on.
It also has some major limitation in today’s market environment. It cannot take into account new
business model and the dynamics of the market.
ADVANTAGES OF PORTER’S FIVE FORCE MODEL
1. The model is a strong tool for competitive analysis at industry level
2. It provides useful inputs for performing swot analysis.

8. LIMITATIONS/DISADVANTAGES OF FIVE FORCE MODEL
1. The model is best applicable for analysis of simple market structure. A comprehensive
description and analysis of all forces is difficult in complex business with segments.
2. The model assumes relatively static market structure. It is hardly a case of today’s market
structure.
3. The model is based on the idea of competition, it does not consider other factors like
strategic alliance, electronic linking of information system of all companies along value
chain.