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

Porter's five forces

• Porter’s five forces model identifies 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

The five forces

• Entry threat

  • How easily new competitors could enter the market

• Buyer power

  • How much influence customers have over price and terms

• Supplier power

  • How much influence suppliers have over price and terms

• Rivalry

  • How intense the competition is between existing businesses in the same market

• Substitute threat

  • How easily customers could switch to a different type of product that meets the same need

Influences on the five forces

Rivalry

• The level of rivalry is high when:

  • There are more competitors, as businesses fight harder for the same customers

  • Competitors are a similar size, since no single business dominates the market

  • The market is growing slowly, as businesses can only grow by taking customers from rivals

  • Products are very similar, since customers can switch easily based on price alone

  • Exit barriers are high, so struggling firms keep competing rather than leaving the industry

Example

Tesco, Sainsbury's, Asda and Aldi compete intensely on price, since their products are similar and customers can switch easily between them

Buyer power

• The threat of buyer power is high when:

  • There are few large buyers, since each one matters more to the seller

  • Customers can easily switch to a competitor

  • It is cheap and easy for customers to switch to a new supplier

  • Customers care a lot about price

  • Customers can easily compare prices and quality, for example online

Example

Large supermarkets have strong buyer power over small food producers, since they buy in huge volumes and can switch suppliers if prices aren't competitive

Supplier power

• The threat of supplier power is high when:

  • There are few suppliers, since businesses have fewer choices

  • The material or component supplied is hard to replace

  • It is expensive or difficult for a business to change to a new supplier

  • The buyer only makes up a small share of the supplier's sales, so the supplier has less to lose by losing that customer

Example

Chip makers such as Nvidia hold strong supplier power over some technology companies, since only a small number of businesses can produce the most advanced computer chips

Entry threat

• The entry threat is high when:

  • It is cheap and easy to start up, for example because minimal capital investment is required

  • Existing businesses have weak brand loyalty

  • It is easy for a new business to get its products to customers

  • There are few laws or licences making it difficult to enter the industry

Example

It is easy for a new company to start an online food delivery app, since it requires relatively little upfront investment and few specialist licences compared with entering an industry like car manufacturing

Substitute threat

• The substitute threat is high when:

  • There are many different products that meet the same customer need

  • Substitutes are cheaper or work just as well

  • It is easy and cheap for customers to switch to the substitute

Example

Streaming services such as Netflix act as a substitute threat to cinemas, since customers can choose to watch films at home instead