Phi Tran

Pepperdine Graziadio Business School of Management

ECNM 469, Dr. Sean Jasso
2/6/2019
Reading Notes: Porter’s Five Forces

Central Theme
Diverse market companies like Pepsi, has entered the bottled water industry; Microsoft has a
seat in the web browser platform and Apple has a unique advantage in the music industry. To
understand industry competition and profitability, one must understand the industry’s underlying
structure in terms of the five forces (Porter, 2008).
Weather and business cycles can affect the short run of profitability. Long run industry
profitability is affected by the structure of the industry a company is in. For example, the average return
on invested capital in U.S. industries on the high end are soft drinks. Soft drinks industry were six times
more profitable than the airline industry during 1992 and 2006.
Dr. Porter outlines seven advantages incumbent companies have over new entrants trying to
gain market share, which puts pressures on prices, costs, and ROI’s. He also gives examples of new
entrants who bypassed incumbent companies’ advantages, and examples on how understandings of the
underlying industry structure can better improve competitiveness for a company. He discusses how
Starbucks boosts investments in aggressively modernizing stores and menus to keep the high threat of
entrants at bay.
Discount stores, Target and Walmart, strategically located their stores in free-standing sites,
rather than regional shopping centers where all department stores were entrenched (HBR, pg. 82).
Porter explains this was a way for new entrants found a way around dealing with the geographic
location advantage of incumbent companies. Realizing there is unequal access to distribution channels
can be a way to deter new entrants, however, the smaller airlines have avoided using travel agents and
may avoid entry barriers such as capital requirements due to the high resale value for planes making
financing easier.
In summary, new entrants must strategize how to enter an industry with all the advantages and
disadvantages incumbent companies have. Strategies such as issuing vigorous public statements
defending their market position and reaffirming their commitment to defending market shares.
Incumbent companies have the abilities to possess resources to fightback with cash/bargaining power as
well as clout within distribution channels and customers, and if the industry growth rate is slow,
newcomers must force market share from incumbents (HBR, pg. 80). Newcomers must also be aware of
the costs of switching or modifying their existing embedded data or resource planning systems, when
entering a new industry.
A company can be limited to increasing its prices to earn a profit due to the power of suppliers
in an industry. Suppliers such as Microsoft has raised prices on operating systems, leaving a narrower
margin on PC maker’s earnings (HBR, pg. 82). According to Porter, Microsoft is a powerful supplier
because it is more concentrated than the fragmented PC assemblers it sells its operating systems to.
Suppliers also don’t necessarily sell to just one industry and can extract maximum profits from others.
One weakness for industry participants is switching costs, which can be high when forced to
retrain workers on new data systems and new equipment. An example of an industry participant
affected from one of its suppliers is the differentiated products a pharmaceutical company can have.
Medicine can offer distinctive benefits over the services received by hospitals (HBR, pg. 83).
On the other side of suppliers, the power of buyers can drive up costs and force down prices
through demanding better quality or more service (HBR, pg. 83). In marketing, this is referred to as a
buyer’s market. Demand can generally play an industry participant against another at the expense of
industry profitability.
The negotiating leverage of prices from buyers comes when there are few buyers in their
market, or when there are large volumes of buyers which are powerful in industries with high fixed costs
(HBR, pg. 83). When buyers believe they can find an equivalent product, it will empower them.
Buyers can be price sensitive. They can realize that a certain product for sale may have low
manufacturing costs, and buyers will shop elsewhere. Since buyer’s profits are low, they are also under
pressure to cut costs any where they can. By mainly focusing on price, buyers can influence industries to
offer superior products and services such as investment banking (HBR, pg. 83).
One strategy producers use is avoiding distribution channels in electronic retailers, jewelry
retailers, and agricultural-equipment distributors (HBR, pg. 84). They often exert a strong influence on
purchase decisions by their customers and can leverage bargaining power over producers by creating an
intermediate demand for their customers. Industries can benefit more through down-streaming their
products to end-user consumers (HBR, pg. 84).
Substitutes for your business services and products can be threatening due to the attractiveness
of the price-performance tradeoff. Close substitutes have a tighter lid on an industry’s profit potential
(HBR, pg. 84). One example is substituting a long-distance telephone service for an inexpensive internet-
based phone service, such as Vonage or Skype.
Strategists should be particularly sensitive to changes in other industries, such as the durability
of plastics. Plastic’s in one industry can affect the steel-dependent automotive industry (HBR, pg. 85).
Being aware that firms cannot read each other’s intentions well is another strategy. Often, substitutes
become rivalry, and competition can come from seemingly unrelated businesses, which can impact
industry profitability (HBR, pg. 84).
Intense rivalry among competitors is at the center of these forces. Rivalry can take on many
forms. Price discounting, new product introductions, advertising campaigns, and service improvements
are some Porter outlines (HBR, pg. 85). Rivalry can cause competitive prices, which is then directly
transferred to its customers.
Intensity of rivalry is greatest if competitors are numerous or equal in size. Also, when industry
growth is slow. Rivalry also occurs when one company is committed to leadership. Another is having
goals that go beyond economic performance in that industry (HBR, pg. 85).

Critical Analysis
Key highlights of high points of each threat are exemplified, bulleting current issues that stretch
to different extremities of businesses. Dr. Porter’s main strategy overall is to know the structure of the
industry a company is in, and to realize it’s potentials and openness to threats. By doing so, a company
can truly realize the profitability of an industry.
Although this model is vague, it serves to diminish the unknown causes of threats and points out
key strategies that serve as the core for industry realization. Perhaps in a different, but relevant analysis,
one can highlight more practical and realistic approaches, along with these “core” forces. Relevant to
Porter’s five forces could include practical approaches in technology and innovation with focus on
marketing potential, to be precise.

Main takeaway
Porter’s five forces model is a very important framework for strategy. The threats are
identifiable to any company size, regardless of industry and era, and this framework can provide
essential business decisions when considering profitability and potentials for earning and entering an
industry.
 Some industries have greater growth, profit and higher entry barriers than others. Industries are
profitable mainly because of these forces that limit or expand the atmosphere they are in. Low entry
barriers allow higher threats on these forces, which cause shifts in costs, finances and prices.

Works Cited

1. Porter, Michael. Jan 2008. “The five competitive forces that shape strategy”. Harvard Business
Review publication. Accessed 2/6/2019. Retrieved from Pepperdine databases.