Porter's Five Forces Model

• Success of a business is related to the characteristics of the industry it operates in.

Industry Analysis

• Organizations can evaluate their position relative to others through industry analysis.
• Industry analysis gives greater insight to guide decision-making and strategy formulation.

Porter's Five Forces Model

• Primary tool is for conducting industry analysis.
• Michael Porter created the model in 1979.
• This is also known as the competitive forces model.
• Considers five characteristics of an industry to determine profitability.
• The model's five forces are:
  • Competition in the industry
  • Potential for new entrants
  • Power of suppliers
  • Power of consumers
  • Threat of substitute products

Potential for New Entrants

• An industry's profitability is affected by how easily competitors enter the market.
• Easy entry means more competition and lower profits.
• A hard entry sustains the position of established companies.
• Examples
  • Starting a coffee shop is easy and has a low barrier.
  • Car manufacturing is hard and has a high barrier.
• Starting a coffee shop is easy and considered a low barrier to entry because:
  • It needs modest investment; even a food cart can get started.
  • Equipment like coffee machines, tables, and chairs are affordable.
  • Finding coffee suppliers is uncomplicated because coffee beans can be found easily.
  • No advanced technology or complex manufacturing requirements.
  • Regulations are simple, including food safety and business permits.
• Many people can start a coffee business with little experience or investment.
• Competition is high and there are many coffee shops because starting is easy.
• A coffee business owner needs to work hard to stand out, for example, by having unique branding and amazing customer service.
• Entering car manufacturing is difficult and considered a high barrier to entry because:
  • Massive capital investment is necessary, building factories, buying machines, and hiring engineers costs billions of dollars.
  • Advanced technology is needed; making cars requires expertise, research, and strict safety tests.
  • Requires strong brand loyalty; people trust established brands like Toyota, Ford, and Tesla, making it hard for new companies to attract customers.
  • Complex supply chain where thousands of parts (engines, tires, electronics) must be sourced and assembled perfectly.
  • Strict regulations from government strict environmental and safety laws, requiring expensive testing and approvals.
• Very few new companies can enter since it's a high barrier.
• It takes years before a new car brand competes with established companies.
• High barriers protect existing companies because there are fewer competitors.
• Established firms don't need to worry about newcomers when there are many barriers to entry.

Competition in the Industry

• The number and strength of rivals in an industry directly affects industry profitability.
• More rivals make it more difficult to stand out, reducing market power.
• The difficulty is worsened when an industry sells very similar products.
• Strong competition can force firms to lower prices to attract more customers.
• Having no rivals means a firm can charge higher prices with minimal consequences.

Industry Rivalry (Competitors in the Market)

• It's important to identify how intense the competition is between existing companies.
• When it is determined, companies must lower prices, improve quality, and spend more on marketing.
• In low-rivalry markets, companies set higher prices and have stable profits.
• Fast food companies like McDonald's, Burger King, and KFC are examples of markets with high levels of competition.

Power of Suppliers

• The negotiating power of suppliers providing business input potentially impacts an industry’s profitability.
• Input unique and provided by few suppliers causes them to have more power over firms.
• This is further compounded since firms have no alternative when purchasing these inputs.
• More supplier power decreases industry profitability because they can charge higher prices.
• Less dependence on a single supplier gives businesses an opportunity to buy input at a lower cost, increasing profitability in the industry.

Bargaining Power of Suppliers

• It's important to access how much control suppliers have over prices and the availability of raw materials.
• Suppliers who are powerful and few in number can increase prices, making it expensive for businesses.
• Businesses can negotiate better prices when there are many weak suppliers.
• Apple depends on specific chip manufacturers, giving the suppliers power.
• Restaurants have many food suppliers, giving them bargaining power.

Power of Consumers

• The negotiating power of consumers also affects the profitability of an industry.
• Consumers have more power to negotiate for cheaper prices when purchasing a good because of plentiful options.
• Low industry profits are a result of more consumer power.
• Products provided by a few firms reduce consumers’ negotiating power where firms may charge higher prices.

How Much Influence do Customers Have

• How much influence do customers have over pricing and products?
• Customers will demand better quality and lower prices when they have many choices.
• Companies may charge higher prices when customers have few choices.
• Example: Airlines must keep fares competitive, whereas luxury brands like Rolex have more control over pricing.

Threat of Substitute Products

• The presence of substitute products also affects the profitability of an industry.
• The substitutes offer consumers options when looking for a particular good or service.
• This increases consumer's negotiating power, causing firms to lower prices to have consumers purchase.
• Consumers that have no substitutes available have no option but to consume that product, where firms can charge higher prices.

Alternative Products

• It's important to identify whether there are other products that can replace the company's product.
• Customers can switch if many substitutes exist, forcing businesses to improve.
• A strong position exists when no substitutes exist.
• Coca-Cola competes with many drinks while medicine for a rare disease has few, making it more powerful.

Porter’s Five Forces Model Advantages

• Helps categorize the main external forces that affect an industry's profitability.

Porter’s Five Forces Model Disadvantages

• Provides only a static image of the industry.
• Insights gained may not hold true with evolving forces.
• Is prone to being misused by firms.
• The tool analyzes entire industries, not individual firms.

Environmental Analysis:

• Environmental Analysis is a tool used by businesses to categorize external opportunities and threats.
• These external factors are uncontrollable and can either aid or hinder firm performance.

PESTEL Analysis

• The most popular framework is for conducting an environmental analysis.
• Includes political, economic, social, technological, environmental, and legal factors.

Political Factors

• How governments and political events impact the business environment.
• Can refer to political policies or the stability of a government.
• Presidential election years spike in demand for political t-shirt printing.

Economic Factors

• The current state of the national and global economy and its impact.
• Sustained economic growth, higher interest rates, or changing exchange rates impact businesses.
• The global financial crisis of 2008 caused businesses around the world stress.

Social Factors

• Focuses on the cultural norms and expectations that impact businesses.
• Can include demographic changes, trends, and taboo topics.
• Examples of strategies can be affected when the rising number of people are using smartphones.

Technological Factors

• Innovations and improvements impacting business operations.
• Can include new resources, materials, or tools to advance an industry.
• The onset of e-commerce platforms has opened up new avenues and space for firms to make sales.

Environmental Factors

• Consideration in environmental factors that push firms to succeed or fail.
• This includes increased scarcity of raw materials and consideration for environmental impact.
• New pollution and carbon footprint targets caused changes in the operations of a business.
• These factors tend to overlap with other categories of the PESTEL analysis.
• Zero-waste trends can fall under both environmental and social.

Legal Factors

• Different laws and regulations require businesses to abide by consumer protection laws and product safety regulations.
• Regulations are not limited to national laws, as businesses are expected to abide by foreign market rules as well.
• The Plastic Ban is an example, where single use plastic bans force restaurants to consider alternatives for their delivery businesses.

Ethical factors

• Relatively new consideration in environmental analyses.
• Ethics and morals consider how businesses treat their stakeholders.
• Converts the PESTEL analysis into the PESTELE analysis.

Jollibee PESTEL

• Political Factors: Government Regulations on Food Industry, must comply with the Food and Drug Administration (FDA) regulations on food safety and sanitation,Tax Policies, Labor Laws.
• Economic Factors: Inflation and Price Increases, Exchange Rate Fluctuations, Post-Pandemic Recovery.
• Social Factors: Filipino Food Culture & Brand Loyalty, Health Consciousness, Overseas Filipino Market (OFWs).
• Technological Factors: Digitalization & Online Ordering, Self-Service Kiosks, Al & Automation.
• Environmental Factors: Sustainable Packaging, Climate Change Impact, Energy Consumption.
• Legal Factors: Compliance with Food Safety Standards, Franchising & Business Laws, Advertising Regulations.