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

The impact of the five forces on business

• The five forces model helps a business judge whether entering, staying in, or leaving an industry is likely to be profitable

  • Strong forces overall reduce profitability, as businesses face higher costs, lower prices or more intense competition

  • Weak forces overall support higher profitability, since a business has more control over pricing and faces less pressure from competitors, buyers or suppliers

• Different forces matter more or less depending on the industry, so a business needs to work out which pressures affect it most

  • An industry with high rivalry, strong buyer power and a real threat of new entrants, such as fast fashion retail, tends to have lower average profit margins than one with weaker forces overall, such as patented pharmaceuticals

Influencing and responding to change in the five forces

• Porter argued that once a business fully understands the five forces in its own context, it can take strategic decisions to achieve and sustain a competitive advantage

How a business might influence each force

Entry threat

• Businesses raise barriers to entry to stop new rivals getting started, for example by investing in patents, large-scale production or a strong brand, making it expensive for others to enter

Example

Drug companies such as GlaxoSmithKline spend heavily on research and hold long patent protections, which can keep new competitors out of the market for years

Bargaining power of buyers

• When customers can demand lower prices, a business can make its products stand out, or use loyalty schemes to lock customers in and keep prices stable

Example

Apple's iPhone range, including its App Store, iMessage and accessories, makes it hard and costly for users to switch to another brand

Bargaining power of suppliers

• If only a few suppliers control important materials, a business can use multiple suppliers, make its own parts, or sign long-term contracts to secure better prices

Example

Supermarkets such as Tesco and Sainsbury's sell own-brand food to reduce their reliance on big suppliers like Nestlé or Unilever, and to negotiate lower prices

Substitute threat

• When other products meet the same need, a business can add unique features, bundle services, or improve convenience to keep customers loyal

Example

Cinema chain Vue offers luxury recliner seats, gourmet snacks and membership plans, making a visit feel more exciting and social than watching films at home on streaming services

Rivalry

• In highly competitive markets, a business can choose to compete as the lowest-cost producer, or differentiate on quality and service to attract customers

Example

Ryanair competes on being the cheapest airline in Europe, while British Airways focuses on premium cabins, lounges and frequent-flyer benefits

How a business might respond to changes in the five forces

• Monitoring the market regularly helps a business spot early signs that a force is getting stronger or weaker, so it can react in good time

  • If rivalry increases, for example due to a new competitor arriving, a business may need to cut prices, improve its product, or invest more in marketing to defend its position

  • If buyer power increases, for example because customers gain more choice or information, a business may need to improve customer service to keep them

  • If supplier power increases, for example because a key material becomes scarce, a business may need to find alternative suppliers, alternative materials, or start making the part itself

  • If the entry threat increases, for example because new technology makes it cheaper to start up, a business may need to strengthen its brand or lower its costs to stay competitive

  • If the substitute threat increases, for example due to a new technology, a business may need to innovate or add new value to its product to stay relevant

Example

When streaming became a serious substitute threat to DVD rental, Blockbuster failed to respond quickly enough and collapsed, while Netflix adapted its own business model from DVD rental by post into streaming, helping it survive and grow instead