Topic 4.4 Notes – Strategic Frameworks: Porter’s Five Forces and SWOT Analysis

What Porter’s Five Forces Is

Porter’s Five Forces is a strategy tool for judging the competitive intensity, attractiveness, and profit potential of a market. Businesses use it when deciding things like whether to enter a market, launch a product, stay in a market, or price aggressively.

The big idea is simple:

• Strong forces squeeze profits and make the market less attractive
• Weak forces leave more room for profit and make the market more attractive

That idea is what the Five Forces model is meant to capture.

Porter’s Five Forces model

In this topic, market attractiveness means profit potential for businesses. It does not mean customers like the product.

A good Five Forces analysis uses a specific competitive environment. “Food” is way too broad. “Subscription-based prepared lunches for midsize employers in one city” is much better because you can actually identify the rivals, buyers, suppliers, entrants, and substitutes.

The Five Forces

These five forces all describe pressure on a business’s ability to compete successfully.

Existing competitive rivalry

This is competition among businesses already in the market. These are direct competitors, meaning they sell similar products to similar customers.

Rivalry is stronger when:

• there are many rivals
• products are similar
• businesses have little pricing power

Rivalry is weaker when:

• there are fewer rivals
• products are meaningfully differentiated
• businesses can raise prices without losing too many customers

One thing students mix up a lot is rival vs substitute. A rival is the same kind of seller. A substitute solves the same customer problem in a different way.

Threat of new entrants

This force asks how easy it is for new businesses to enter the market. That depends on barriers to entry.

Common barriers include:

• startup capital requirements
• specialized knowledge or technology
• patents and other intellectual property
• licenses and regulation
• economies of scale
• strong brand loyalty
• access to suppliers or distribution
• time, training, and infrastructure

The exam trap here is very common:

• low barriers = strong threat of entry
• high barriers = weak threat of entry

Threat of substitute products

A substitute is a different product or service that meets the same need.

Strong substitutes happen when customers have alternatives that are:

• cheaper
• easier to access
• higher quality
• more convenient

For prepared lunch providers, other prepared lunch providers are rivals. Restaurants, cafeterias, grocery-store meals, delivery apps, or bringing lunch from home are substitutes.

Customer power

Customer power means buyers can pressure the business to lower prices or give better terms.

Look at:

• number of customers
• importance of each customer
• customer acquisition costs
• switching costs

Switching costs include both:

• monetary costs like fees, setup costs, retraining
• psychological costs like uncertainty or loss of familiarity

Customer power is strong when there are few customers, each one matters a lot, replacing them is expensive, and switching costs are low.

Supplier power

Supplier power is the ability of suppliers to raise input costs-the prices they charge for raw materials and component parts-or impose worse terms.

Look at:

• number of suppliers
• switching costs between suppliers
• how competitive the supply market is

Supplier power is strong when there are few qualified suppliers and switching is costly, risky, or slow.

How to Apply Five Forces

A full Five Forces answer usually moves in this order:

1. Define the market clearly
2. Find evidence for each force
3. Decide whether each force is strong or weak
4. Explain how that affects profitability
5. Make an overall judgment about market attractiveness

Don’t just count how many forces are strong. One force can dominate the whole market.

A good scenario example is a teacher case like subscription meal providers in one city. Evidence might look like this:

• annual bidding for contracts suggests strong rivalry and strong customer power
• shared kitchens lower startup costs, so entrant threat gets stronger
• restaurants, cafeterias, and meal prep at home create strong substitutes
• only a few qualified distributors create stronger supplier power

That same style of analysis shows up when discussing Crepes & Waffles and Square Meal Feeds. The point is always the same. Use specific evidence, classify the force correctly, then connect it to profits.

What SWOT Analysis Is

SWOT evaluates a specific business, not just the market. It asks whether that business has what it needs to reach its goals and stay competitive.

The four parts are:

• Strengths
• Weaknesses
• Opportunities
• Threats

The split you need to keep straight is:

• strengths and weaknesses = internal
• opportunities and threats = external

This grid is the quick visual to remember that split.

SWOT analysis grid

Strengths

These are internal advantages, such as:

• core competencies
• brand recognition
• intellectual property
• product quality
• ample funds
• skilled employees
• supply chain efficiency
• reputation
• superior technology

Weaknesses

These are internal disadvantages, such as:

• missing core competencies
• low brand recognition
• product flaws
• limited funds
• inability to staff skilled employees
• poor customer service
• outdated technology
• supply chain risks
• inefficient operations

Opportunities

These are favorable external factors beyond the business’s control, such as:

• market growth
• reduced competition
• technological advances
• favorable regulation
• new customer segments
• shifts in customer preferences that increase demand

A classic mistake is calling a plan an opportunity. “We will launch an app” is a strategy choice, not an opportunity. A new technology that makes that app more effective could be an opportunity.

Threats

These are unfavorable external factors, such as:

• rising input costs
• natural disasters
• unfavorable regulation
• changing customer preferences
• new competition
• disruptive innovation

Disruptive innovation changes how customers meet the need. It is more than a normal product improvement.

How to Apply SWOT and Connect It to Strategy

A solid SWOT answer follows this path:

1. State the business and the decision
2. Identify internal capabilities
   • financial resources
   • physical resources
   • human resources
   • intangible assets like brand, reputation, and IP
3. Classify them as strengths or weaknesses
4. Identify external conditions
   • market size
   • customer preferences
   • PESTEL factors
   • Porter’s Five Forces
5. Classify them as opportunities or threats
6. Turn the analysis into action

That action should sound like this:

• build on strengths
• reduce weaknesses
• capitalize on opportunities
• respond to threats

SWOT works best when you compare the business against:

• rivals
• benchmarks
• past performance
• external factors
• what the strategy requires

This is where Crepes & Waffles and Square Meal Feeds fit. You are judging both the outside environment and the business’s own capabilities.

The relationship between the two frameworks matters a lot:

• Five Forces = market structure
• SWOT = this business’s position

So, few suppliers in Five Forces can become a threat in SWOT. Strong brand loyalty in a market can be a barrier to entry in Five Forces, while your own brand can be a strength in SWOT.