## Porter's Five Forces Model

### What It Is

Porter's Five Forces is an industry-level analysis framework that identifies the five competitive forces shaping an industry's profitability and attractiveness.

### The Five Forces

Force	What It Measures	High Force =
1. Threat of New Entrants	How easy is it for new players to enter?	Lower profitability for incumbents
2. Bargaining Power of Suppliers	Can suppliers dictate terms (price, quality)?	Higher input costs
3. Bargaining Power of Buyers	Can customers force prices down?	Lower margins
4. Threat of Substitutes	Can alternative products replace yours?	Price ceiling on your offerings
5. Rivalry Among Existing Competitors	How intense is competition within the industry?	Price wars, higher marketing costs

### How to Identify the Right Force in a Case

Threat of New Entrants → barriers to entry are low; new companies entering the market.

Bargaining Power of Suppliers → few suppliers, unique inputs, high switching costs for buyers from suppliers.

Bargaining Power of Buyers → few large customers, undifferentiated products, price-sensitive buyers.

Threat of Substitutes → alternative products that serve the same need. Signals: 'cheaper alternatives', 'competing products from other industries'.

Example: EcoForge faces cheaper alternatives (conventional building materials) → Threat of Substitutes

Rivalry → many competitors, low differentiation, slow industry growth.

### Critical Distinction: Substitutes vs Rivals

Rivals are companies selling the SAME type of product (e.g., two eco-building material firms).
Substitutes are products from DIFFERENT categories that serve the SAME customer need (e.g., conventional cement vs eco-bricks).

Worked example

### Example 1

EcoForge — Threat of Substitutes:

The case describes EcoForge facing 'challenges from cheaper alternatives and intense competition.'

'Cheaper alternatives' = conventional, non-eco building materials that serve the same function (shelter construction) at lower cost → Threat of Substitutes.
'Intense competition' could suggest Rivalry, but the key qualifier is 'cheaper ALTERNATIVES' — products from a different category (conventional vs eco) competing for the same use.
Threat of New Entrants does not apply (it's about new players entering the eco-materials space, not existing products in other categories).
Answer: Threat of Substitutes (d)

### Example 2

Applying Five Forces to identify strategy implications:

If Porter's Five Forces analysis shows HIGH Threat of Substitutes in an industry:

Companies must differentiate their offerings so buyers can't easily switch.
This is why EcoForge pursued green certifications — to make their product less substitutable.
If Bargaining Power of Buyers is HIGH instead, the strategic response would be to increase switching costs (like Zing's branded software) or lock in customers through loyalty programs.

⚠️ Common exam mistakes

Confusing Threat of Substitutes with Rivalry — Substitutes come from DIFFERENT product categories; Rivalry is among companies selling the SAME type of product.
Selecting 'Threat of New Entrants' when the case describes pressure from existing cheaper alternatives — new entrants are companies entering for the first time, not existing alternative products.
Mixing up Bargaining Power of Buyers with Rivalry — buyers are customers exercising negotiating power; rivals are competing firms.
Thinking 'intense competition' always means Rivalry — it could mean Threat of Substitutes if the competition is from different product categories.
Ignoring that all five forces together determine industry attractiveness — a single strong force can make an entire industry unattractive even if the other four forces are favourable.

Reference:

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