Porter's 5 Forces

Porter's 5 Forces

Identifying the forces that shape the competitive landscape is a fundamental task for companies. But not only there, in interviews for product managers, competitors also play a role.
With Porter's 5 forces it is possible to have a structural first approach.

While Porter is offering a good starting point, in practice it is always a good idea to look left and right!

Threat of new entrants

When the industries yield high returns, it will attract new entities. A more competitive environment will lead to a decrease in profitability. To solve this issue incumbents make those entries more difficult via entry barriers. Otherwise, in perfect competition, the profitability will be zero.

Typical market entry barriers:
- economies of scale
- switching costs
- capital requirements
- customer loyalty
- brand equity
- distribution channels
- regulations or patents

Threat of substitutes

Substitutes solve the same economic need your product is, in a different way. Uber vs Lyft vs Taxi, AirBnB vs Hotels, Pepsi vs Coke ...

Relevant factors:
- Relative price performance
- Switching Costs
- Perceived level of product differentiation
- Number of substitute products
- Ease of substitution
- availability of close substitute

Bargaining power of customers

When the market has only a few key customers, those are sometimes able to pressure suppliers.

Key Factors:
- Buyer concentration
- Degree of dependency upon existing channels of distribution
- Bargaining leverage, particularly in industries with high fixed cost
- Buyer switching costs
- Buyer information availability
- Availability of existing substitute products
- Buyer price sensitivity
- Differential advantage (uniqueness) of industry products

Bargaining power of suppliers

Is the product reliant on other products or resources, then the supplier has bargaining power.

Key Factors:
- Supplier switching costs relative to firm switching costs
- Degree of differentiation of inputs
- Impact of inputs on cost and differentiation
- Presence of substitute inputs
- Strength of distribution channel
- Supplier concentration to firm concentration ratio
- Employee solidarity
- Supplier competition: the ability to forward vertically integrate and cut out the buyer.

Competitive rivalry

How intense is the competition landscape.

Potential factors:
- Sustainable competitive advantage through innovation
- Competition between online and offline organizations
- Level of advertising expense
- Powerful competitive strategy
- Firm concentration ratio