Competition: Porter's Five Competitive Forces
Two industries can look equally promising on paper and end up being very different: in one, companies earn good profits year after year; in the other, they fight over price until they have no profit left. Think of the taquerías on a corner in Mexico City compared with the CFE, which is almost the only company that distributes electricity. Porter's model explains the difference by looking at who has power over whom.
The five forces model
Now practice with the diagram: in this version one of the five forces is missing, marked with a "?".
List Porter's five competitive forces and explain in one sentence what each analyses.
List Porter's five competitive forces and explain in one sentence what each analyses.
Indicate which of Porter's forces corresponds to each event: a new franchise opens opposite, the main supplier increases its prices by 20%, customers can switch brands…
Indicate which of Porter's forces corresponds to each event: a new franchise opens opposite, the main supplier increases its prices by 20%, customers can switch brands at no cost, and a product appears that fulfills the same need in a different way.
The figure shows the diagram of the five competitive forces, with rivalry at the center. Identify the missing force, marked with '?', and explain under what conditions…
The figure shows the diagram of the five competitive forces, with rivalry at the center. Identify the missing force, marked with '?', and explain under what conditions that force is strong.
Rivalry and barriers to entry
A local coffee shop has three others on the same street. Analyse two of Porter's forces in its case: rivalry among existing competitors and the threat of new entrants…
A local coffee shop has three others on the same street. Analyse two of Porter's forces in its case: rivalry among existing competitors and the threat of new entrants (is it easy to open another coffee shop?), and suggest a way to differentiate itself.
Barriers to entry (economies of scale, established brands, regulation, capital requirements) protect incumbent firms. Give an example of each type of barrier and explain…
Barriers to entry (economies of scale, established brands, regulation, capital requirements) protect incumbent firms. Give an example of each type of barrier and explain what happens to rivalry and pricing when barriers are low.
The power of suppliers and customers
A speciality coffee shop relies on a single coffee roaster that raises its prices every year. Explain which force it is suffering from, why the supplier has so much…
A speciality coffee shop relies on a single coffee roaster that raises its prices every year. Explain which force it is suffering from, why the supplier has so much power in this case, and two strategies to reduce that dependency.
Substitutes and industry attractiveness
Analyse the low-cost gym sector in a large city using the five forces (rivalry, new entrants, substitutes, bargaining power of customers and suppliers) and conclude,…
Analyse the low-cost gym sector in a large city using the five forces (rivalry, new entrants, substitutes, bargaining power of customers and suppliers) and conclude, with a reasoned sentence, whether it is currently an attractive sector to enter.
A local food delivery platform competes with two international giants. Analyse its situation focusing on customer bargaining power (restaurants and end users) and…
A local food delivery platform competes with two international giants. Analyse its situation focusing on customer bargaining power (restaurants and end users) and substitutes (collecting food in person, cooking), and propose two realistic defences for the small platform.
Evaluate before launching
Before spending your savings on a business, it's worth running the idea through a three-step filter: look at the industry from the outside with the five forces, look at yourself from the inside and the outside with a SWOT analysis (FODA), and do some simple math with the break-even point. The five forces answer the first question: is it worth competing in this industry? Evaluating beforehand is much cheaper than fixing things afterward.
SWOT in four boxes
The SWOT (FODA) organizes what you know about your business into four boxes. Two are internal (they depend on you) and two are external (they come from the environment, and that's where the five forces come in):
| Helps | Hurts | |
|---|---|---|
| Internal | Strengths: what you do well (your own recipe, a good location) | Weaknesses: what you lack (little capital, no experience) |
| External | Opportunities: what the environment offers you (a new school nearby) | Threats: what the environment puts against you (new rivals, a supplier who raises prices) |
The break-even point
The break-even point is the number of units you have to sell for profit to be zero: you neither gain nor lose. It is calculated with fixed costs (FC, paid whether you sell or not), the selling price (P), and the variable cost per unit (VC):
$$\text{break-even units} = \frac{CF}{P - CV}$$Why? Each unit sold leaves $P - CV$ pesos to cover fixed costs; you have to sell as many units as it takes to collect them all.
"An industry with many competitors is always a terrible industry to enter." Refute this statement by applying Porter's five forces model: a) Justify how the weakness of…
"An industry with many competitors is always a terrible industry to enter." Refute this statement by applying Porter's five forces model:
- a) Justify how the weakness of other competitive forces (customers, suppliers, or substitute products) can offset high rivalry and allow for attractive margins.
- b) Illustrate your answer by proposing a specific example of a real company or subsector where strong rivalry among competitors exists but entering remains profitable, justifying which competitive advantage it would rely on.
Back to the beginning: an industry with high sales can be ruinous if the five forces squeeze at once, while another, less eye-catching one, protected by high barriers and scattered customers, yields high and sustainable profits.