There is continuing interest in the study of the forces that impact on an organisation, particularly those that can be

harnessed to provide competitive advantage. The ideas and models which emerged during the period from 1979 to the
mid-1980s (Porter, 1998) were based on the idea that competitive advantage came from the ability to earn a return on
investment that was better than the average for the industry sector (Thurlby, 1998).

As Porter's 5 Forces analysis deals with factors outside an industry that influence the nature of competition within it, the
forces inside the industry (microenvironment) that influence the way in which firms compete, and so the industry’s likely
profitability is conducted in Porter’s five forces model. A business has to understand the dynamics of its industries and
markets in order to compete effectively in the marketplace. Porter (1980a) defined the forces which drive competition,
contending that the competitive environment is created by the interaction of five different forces acting on a business. In
addition to rivalry among existing firms and the threat of new entrants into the market, there are also the forces of supplier
power, the power of the buyers, and the threat of substitute products or services. Porter suggested that the intensity of
competition is determined by the relative strengths of these forces.

Main Aspects of Porter’s Five Forces Analysis

The original competitive forces model, as proposed by Porter, identified five forces which would impact on an
organization’s behaviour in a competitive market. These include the following:

• The rivalry between existing sellers in the market.

• The power exerted by the customers in the market.
• The impact of the suppliers on the sellers.
• The potential threat of new sellers entering the market.
• The threat of substitute products becoming available in the market.

Understanding the nature of each of these forces gives organizations the necessary insights to enable them to formulate
the appropriate strategies to be successful in their market (Thurlby, 1998).

Force 1: The Degree of Rivalry

The intensity of rivalry, which is the most obvious of the five forces in an industry, helps determine the extent to which the
value created by an industry will be dissipated through head-to-head competition. The most valuable contribution of
Porter's “five forces” framework in this issue may be its suggestion that rivalry, while important, is only one of several
forces that determine industry attractiveness.

• This force is located at the centre of the diagram;

• Is most likely to be high in those industries where there is a threat of substitute products; and existing power of suppliers
and buyers in the market.

Force 2: The Threat of Entry

Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based
on the market entry barriers. They can take diverse forms and are used to prevent an influx of firms into an industry
whenever profits, adjusted for the cost of capital, rise above zero. In contrast, entry barriers exist whenever it is difficult or
not economically feasible for an outsider to replicate the incumbents’ position (Porter, 1980b; Sanderson, 1998) The most
common forms of entry barriers, except intrinsic physical or legal obstacles, are as follows:
• Economies of scale: for example, benefits associated with bulk purchasing;
• Cost of entry: for example, investment into technology;
• Distribution channels: for example, ease of access for competitors;
• Cost advantages not related to the size of the company: for example, contacts and expertise;
• Government legislations: for example, introduction of new laws might weaken company’s competitive position;
• Differentiation: for example, certain brand that cannot be copied (The Champagne)

Force 3: The Threat of Substitutes

The threat that substitute products pose to an industry's profitability depends on the relative price-to-performance ratios of
the different types of products or services to which customers can turn to satisfy the same basic need. The threat of
substitution is also affected by switching costs – that is, the costs in areas such as retraining, retooling and redesigning
that are incurred when a customer switches to a different type of product or service. It also involves:

• Product-for-product substitution (email for mail, fax); is based on the substitution of need;
• Generic substitution (Video suppliers compete with travel companies);
• Substitution that relates to something that people can do without (cigarettes, alcohol).

Force 4: Buyer Power

Buyer power is one of the two horizontal forces that influence the appropriation of the value created by an industry (refer
to the diagram). The most important determinants of buyer power are the size and the concentration of customers. Other
factors are the extent to which the buyers are informed and the concentration or differentiation of the competitors.
Kippenberger (1998) states that it is often useful to distinguish potential buyer power from the buyer's willingness or
incentive to use that power, willingness that derives mainly from the “risk of failure” associated with a product's use.

• This force is relatively high where there a few, large players in the market, as it is the case with retailers an grocery
stores;
• Present where there is a large number of undifferentiated, small suppliers, such as small farming businesses supplying
large grocery companies;
• Low cost of switching between suppliers, such as from one fleet supplier of trucks to another.

Force 5: Supplier Power

Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power typically focuses first on
the relative size and concentration of suppliers relative to industry participants and second on the degree of differentiation
in the inputs supplied. The ability to charge customers different prices in line with differences in the value created for each
of those buyers usually indicates that the market is characterized by high supplier power and at the same time by low
buyer power (Porter, 1998). Bargaining power of suppliers exists in the following situations:

• Where the switching costs are high (switching from one Internet provider to another);
• High power of brands (McDonalds, British Airways, Tesco);
• Possibility of forward integration of suppliers (Brewers buying bars);
• Fragmentation of customers (not in clusters) with a limited bargaining power (Gas/Petrol stations in remote places).

The nature of competition in an industry is strongly affected by suggested five forces. The stronger the power of buyers
and suppliers, and the stronger the threats of entry and substitution, the more intense competition is likely to be within the
industry. However, these five factors are not the only ones that determine how firms in an industry will compete – the
structure of the industry itself may play an important role. Indeed, the whole five-forces framework is based on an
economic theory know as the “Structure-Conduct-Performance” (SCP) model: the structure of an industry determines
organizations’ competitive behaviour (conduct), which in turn determines their profitability (performance). In concentrated
industries, according to this model, organizations would be expected to compete less fiercely, and make higher profits,
than in fragmented ones. However, as Haberberg and Rieple (2001) state, the histories and cultures of the firms in the
industry also play a very important role in shaping competitive behaviour, and the predictions of the SCP model need to
be modified accordingly.

SWOT has a long history as a tool of strategic and marketing analysis. No one knows who first invented SWOT analysis.
It has features in strategy textbooks since at least 1972 and can now be found in textbooks on marketing and any other
business disciplines. It advocates say that it can be used to gauge the degree of “fit” between the organisation’s strategies
and its environment, and to suggest ways in which the organisation can profit from strengths and opportunities and shield
itself against weaknesses and threats (Adams, 2005). However, SWOT has come under criticism recently. Because it is
so simple, both students and managers have a tendency to use it without a great deal of thought, so that the results are
often useless. Another problem is that SWOT, having been conceived in simpler times, does not cope very well with some
of the subtler aspects of modern strategic theory, such as trade-offs (De Witt and Meyer, 1998).

Strengths

Determine an organisation’s strong points. This should be from both internal and external customers. A strength is a
“resource advantage relative to competitors and the needs of the markets a firm serves or expects to serve”. It is a
distinctive competence when it gives the firm a comparative advantage in the marketplace. Strengths arise from the
resources and competencies available to the firm.

Weaknesses

Determine an organisation’s weaknesses, not only from its point of view, but also more importantly, from customers.
Although it may be difficult for an organisation to acknowledge its weaknesses it is best to handle the bitter reality without
procrastination. A weakness is a “limitation or deficiency in one or more resources or competencies relative to competitors
that impedes a firm’s effective performance”.

Opportunities

Another major factor is to determine how organisations can continue to grow within the marketplace. After all,
opportunities are everywhere, such as the changes in technology, government policy, social patterns, and so on. An
opportunity is a major situation in a firm’s environment. Key trends are one source of opportunities. Identification of a
previously overlooked market segment, changes in competitive or regulatory circumstances, technological changes, and
improved buyer or supplier relationships could represent opportunities fro the firm.

Threats

No one likes to think about threats, but we still have to face them, despite the fact that they are external factors that are
out of our control, for example, the recent economic slump in Asia. It is vital to be prepared and face threats even during
turbulent times. A threat is a major unfavourable situation in a firm’s environment. Threats are key impediments to the
firm’s current or desired position. The entrance of new competitors, slow market growth, increased bargaining power of
key buyers or suppliers, technological changes, and new or revised regulations could represent threats to a firm’s
success.

Because SWOT is such as familiar and comforting tool, many students use it at the start of their analysis. This is a
mistake. In order to arrive at a proper SWOT appraisal, other analyses need to be carrier out first.

• Since opportunities and threats mostly arise from the environment, SWOT analysis needs to take account of the results
of a full environmental analysis.
• It is impossible to gauge what an organisation’s real strengths are until you have assessed its strategic resources – in
fact, strategic resources and strength are the same thing. There is a tendency for students to put down anything vaguely
favourable that they can think of about a company as a strength. This temptation needs to be resisted - a strength is not a
strength unless it makes a genuine difference to an organisation’s competitiveness. The same is true of weaknesses.