Imagine you are working with one of the leading telecom service providers. Now, they are planning to enter into the smartphone industry. You are leading the project and have been given the responsibility of analysing competition in the industry and understanding the market attractiveness of the smartphone industry. Your manager suggests to use the Porter's Five Forces framework. How will you initiate the analysis? What are the factors that you will look at while analysing the Porter's Five Forces framework?

With this segment, subject-matter expert Prashanth will introduce you to the dimensions of Porter’s Five Forces framework. This framework will help you to assess the microenvironment (immediate or small-scale environment) of a firm. The next video illustrates the details of the framework:

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So, in the video above, you learnt about Porter’s Five Forces framework and its drawbacks. Let’s summarise the key learnings:

The framework was developed in 1979 by Michael Porter. It is one of the most critical approaches or tools for problem-solving.
Porter’s Five Forces has five dimensions, which are as follows:
- Industry rivalry - Almost every business has rivals. An intense rivalry takes place when the market becomes too crowded. When this happens, the cumulative market share of the top players gets relatively low. Moreover, having too many competitors in the market generally means high-cost pressure which automatically translates to low profitability.
- The threat of new entrants - The new players who are looking to enter the market are referred to as new entrants. These entrants bring a substantial threat along with them. If the industry you operate in is not well regulated by the government or the capital requirement to start a new business is low, then anyone can enter the market anytime and disrupt your business, thus posing a significant threat.
- The threat of substitutes - Substitutes are the products and services that can be an alternative to the existing products or services in the market. Substitutes pose a grave threat to the existing products and services in the market as users can easily switch to them. Moreover, substitutes are generally cheaper than original products or services.
- The threat of suppliers - The threat of suppliers is high if there are only a few suppliers existing in the market. This threat becomes higher if the top 2–5 players enjoy a monopoly in the market. The threat multiplies even further if there is only a single supplier of a commodity or service. If a supplier has the ability to forward integrate, which means to enter into the same line of business as you are, then it also has the ability to push you out of business.
- The threat of buyers - This refers to the ability of customers to sink the prices lower. If your total sale is driven by a small number of customers who purchase from you, then the threat is higher as they have the power to negotiate with you. Therefore, a business must look to expand its customer base to reduce this threat. A good and considerable customer base often ensures that you do not have to compromise on the profitability of your business.

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Based on the learning from this segment, let's now carry out Porter's Five Forces analysis for the smartphone industry:

Industry rivalry -
- There is intense competition in the smartphone industry from the existing brands.
- Also, technological advancements bring in new competition even from low-cost phone manufacturers.
The threat of new entrants -
- The threat of new entrants is low as there is strong brand identity of the existing players. Also, there is a barrier of patent and IP rights for this industry.
- There is high level of capital required to enter the industry. Hence, the threat of new entrants is low.
The threat of Substitutes -
- There are few or no substitutes for smartphones.
- Also, the cost of switching to substitute products like camera, MP3 player, GPS etc are high. Hence, the threat of substitutes is low.
The threat of suppliers -
- The threat of suppliers is moderate to high as there are few suppliers in the market.
The threat of buyers -
- The threat of buyers is high as the customer base is large and also the product offerings are similar within the same price range.

Hence, based on the analysis we can conclude that the market attractiveness for the smartphone industry is moderate.

Porter’s Five Forces model too has some drawbacks:

It relies heavily on the industry structure instead of the company’s core competencies.
It does not take into account a change in government policies and regulations, which, as a matter of fact, has affected many industries.

In the next segment, you will learn about some more frameworks that help with problem-solving.

Additional Resources:

A Detailed Document on Porter's Five Forces