Competition: Porter's Five Forces (AQA A Level Business): Revision Note

An introduction to Porter's Five Forces

• Porter’s Five Forces identify the key pressures on an industry that impact the ability of a business to compete with rivals

• It helps managers think strategically about the environment in which the business operates

Porter's Five Forces

•  Porter argued that once a business fully understands these pressures in their context, they can take strategic decisions to achieve and sustain a  competitive advantage

Entry threat

• If new competitors can enter an industry quickly and without investing a lot of money, then the barriers to entry is low and the threat of new entrants is high

  • The market is likely to contain a large number of rival businesses

  • Individual businesses are likely to have little power

• Where the barriers to entry are too high for new businesses to gain a foothold and compete in the market, the threat of new entrants is low 

Buyer power

• When a business sells to a small number of customers, those customers have significant power to negotiate lower prices 

  • The business has few options when it comes to customers

  • It will have to price and sell products according to customer demands

• Where a business has a high number of customers, those customers have less power

  • It is likely to be able to charge a high price for a product that is relatively inexpensive to produce

Supplier power

• Where a business has a lot of choices over the suppliers from which it buys components

  • It is likely to be able to shop around for lower price

• Where a supplier has significant power over a business as a result of offering a specialised component or where there are a small number of suppliers in the market

  • The business has little choice over the source of its suppliers

  • It is likely to have to pay high prices for its components and accept suppliers’ terms and conditions

Rivalry

• When there are many competitors selling similar products, the business will have little power

  • Many rivals are trying to get a more significant share of the market

  • Customers have a lot of choices and can shop around

• When a business offers products in an industry with little or no competition, it has more power, can use premium pricing and dominate the market 

Threat of substitutes

• Where customers can easily swap a businesses products for those of a rival, the business has little power

  • The business is likely to have to compete on price or invest heavily in developing a USP

• Where substitution is unlikely, a business has significant market power

  • It is likely to be able to charge a high price for its products and may be less inclined to innovate

Porter's Five Forces and competitive strategy

• Managers can use Porter’s Five Forces to shape their competitive strategy

Using the Five Forces model