Porter’s Five Forces Analysis: A Strategic Explanation

What is Porter’s Five Forces?

Porter’s Five Forces is a framework to assess the competitive environment of a business. In the ACCA SBL exam, it’s used to analyse industry attractiveness and inform strategic decisions. It evaluates five forces: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitutes, and competitive rivalry.

Let’s apply it to a fictional coffee shop chain.

Key Components of Porter’s Five Forces

1. Threat of New Entrants: How easy is it for new competitors to enter? (e.g., capital, regulations)
2. Bargaining Power of Suppliers: Can suppliers dictate terms? (e.g., few suppliers, unique inputs)
3. Bargaining Power of Buyers: Can customers influence price/quality? (e.g., many options, low switching costs)
4. Threat of Substitutes: Are there alternatives to the product? (e.g., tea vs. coffee)
5. Competitive Rivalry: How intense is competition? (e.g., many players, slow growth)

Analysis Approach

• Rate each force as Low, Medium, or High.
• Combine findings to assess overall industry risk and strategy.

Example: Coffee Shop Chain (BrewCo)

BrewCo operates 50 urban coffee shops. Let’s analyse its industry:

1. Threat of New Entrants (Medium)

• Factors: Low startup costs ($50,000/shop), but brand loyalty and prime locations deter entry.
• Impact: New cafes can emerge, but BrewCo’s scale offers some protection.

2. Bargaining Power of Suppliers (High)

• Factors: Few premium coffee bean suppliers; BrewCo relies on fair-trade beans (10% costlier).
• Impact: Suppliers can raise prices, squeezing margins (e.g., bean costs up $2/kg last year).

3. Bargaining Power of Buyers (High)

• Factors: Many coffee options (Starbucks, independents); low switching costs for customers.
• Impact: BrewCo must keep prices competitive (e.g., $4/cup vs. $4.50 market average).

4. Threat of Substitutes (Medium)

• Factors: Tea, energy drinks, or home brewing compete; coffee culture still strong.
• Impact: Substitutes exist but don’t fully displace coffee demand.

5. Competitive Rivalry (High)

• Factors: Saturated market (100+ cafes in BrewCo’s city); heavy marketing by rivals.
• Impact: Price wars and loyalty schemes (e.g., BrewCo’s 10% discount card) are common.

Overall Assessment

• High Risks: Suppliers, buyers, and rivalry pressure profitability.
• Strategy: Differentiate (e.g., unique blends) and secure supplier contracts.

What Does This Mean?

• High Supplier Power: BrewCo might negotiate bulk deals or diversify sources.
• High Buyer Power/Rivalry: Focus on branding and customer retention (e.g., loyalty apps).
• Medium Threats: Monitor new entrants and substitutes but prioritise current competition.

Leadership might ask: Can we lock in costs? Should we expand to less crowded markets?

Why It Matters for ACCA SBL

Porter’s Five Forces tests your ability to:

• Analyse external environments strategically.
• Link findings to leadership decisions (e.g., differentiation, cost leadership).
• Present professional, actionable insights.

Practice with case studies (e.g., tech, retail) to pass in SBL!