So, the five forces that determine the industry profitability as per this framework are: Threat of New Entry, Buyer Power, Supplier Power, Threat of Substitution and Competitive Rivalry. There are various parameters which can be used to determine the nature of these forces. Each of the force is classified as low, medium or high depending on the nature of those parameters. The parameters used to measure nature of the forces are described in below diagram.

Ideal scenario to enter an industry is: Entry Barrier=High, Buyer Power=Low, Supplier Power=Low, Threat of Substitution=Low and Competitive Rivalry=Low to medium. Current players try to build high entry barriers to prohibit new comers from entering. Examples of high entry barrier – strong distribution channel of ITC in the Cigarette industry. Example of low Supplier Power – HUL getting long credit periods from suppliers.
The best way to understand any theory is to use an example. So, we have done a basic analysis of Indian Cigarette Industry using Porter’s Five Forces Model. Please find the analysis in presentation format below.

In case you have anything more to share about this framework or have any queries please leave a comment. We would love to hear from you.

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