4.4 Strategic Frameworks: Porter’s Five Forces and SWOT Analysis
Rating each of Porter's five forces, building a SWOT grid, and turning both frameworks into a strategic decision a business can price.
Part 1 of 3 Porter's Five Forces
Porter's Five Forces rates how intense a competitive environment is, how attractive, and how much profit it will support. Use Porter's Five Forces when a decision depends on the market, such as which market to enter or which pricing strategy to adopt. Strong forces cut attractiveness and potential profit; weak forces raise both.
The running example is a drink shop selling about 3,400 drinks a month at $6.00, with $1.50 of ingredients in each, so every drink contributes $4.50 after its own ingredients.
| Force | What it measures | Strong when |
|---|---|---|
| Competitive rivalry | Intensity among existing rivals: how many, how differentiated, how much pricing power | Many direct competitors with equivalent products and little room on price |
| Threat of new entrants | How easily a newcomer can get in, set by barriers to entry | Barriers are low and new businesses can take share |
| Threat of substitutes | Products that meet the same need without competing directly | Alternatives are cheaper, easier to reach or better |
| Customer power | Buyers' power to push prices down: number of customers, acquisition costs, switching costs | Few customers, each a large share of sales, high acquisition costs, low switching costs |
| Supplier power | Providers' ability to raise input costs, set by how competitive the resource market is | Few providers and a high cost to switch |
Rate rivalry first, because rivalry is typically the strongest determinant. The three parts of rivalry can lead to different ratings. For example, rate rivalry strong even with only one rival, when that rival sells a near-identical product and leaves neither seller room on price. Switching costs are the money and effort of changing product or brand. Switching costs are near zero when a rival counter is a short walk away, which is why loyalty punch cards exist. Supplier power can differ for each input. If one importer supplies the tapioca that makes up a fifth of the shop's unit cost, the tapioca input decides the shop's supplier power rating.
Part 2 of 3 SWOT Analysis
SWOT analysis weighs the internal and external factors that shape whether a business can reach its goals and stay competitive. Strengths and weaknesses are internal factors, which the business controls. Opportunities and threats are external factors, which the business does not control.
| Factor | Examples the course gives |
|---|---|
| Strengths | Core competencies, brand recognition, intellectual property, product quality, ample funds, skilled employees, supply chain efficiency |
| Weaknesses | Missing competencies, low brand recognition, product flaws, limited funds, inability to staff skilled roles, poor customer service, outdated technology, supply chain risks |
| Opportunities | Market growth, reduced competition, technology advances, favorable regulatory change |
| Threats | Rising input costs, natural disasters, unfavorable regulatory change, disruptive innovation that changes how customers meet their needs |
Internal capabilities (financial, physical and human resources, plus brand, reputation and intellectual property) count as a strength or a weakness only by comparison with rivals, benchmarks, past performance and outside conditions. A 75% gross margin is a strength because the industry's typical gross margin is near 70%. The external half of SWOT, opportunities and threats, uses market factors such as market size and customer preferences, the PESTEL factors and the Five Forces. Do the Five Forces analysis before the SWOT analysis.
Part 3 of 3 From Grid to Decision
Businesses use the results to build on strengths, address weaknesses, capitalize on opportunities and respond to threats. Calculate the cost of a response before choosing that response. For example, a four-hundred-location chain opens a counter nearby and sells drinks at $5.50, against the shop's $6.00. The shop's first instinct may be to match the $5.50 price. Matching the price cuts contribution from $4.50 to $4.00 a drink. At $4.00 a drink, the shop must sell 3,825 drinks a month instead of 3,400 to hold $15,300 of monthly gross profit. The difference is 425 extra drinks a month just to keep the same gross profit.
In a price war, the business that can afford to lose money longer usually wins. A four-hundred-location chain can afford to lose money longer than a single shop.
Worked Examples
Pricing a Price Match Before Making It
Compute the extra volume a price cut requires just to hold gross profit constant.
A national chain opens two blocks away at an everyday price of five dollars fifty. Steep Street Boba charges six dollars, with a variable cost of one dollar fifty per drink and October gross profit of fifteen thousand three hundred dollars on three thousand four hundred drinks. If the shop matched five dollars fifty, how many drinks would it have to sell to hold the same gross profit, and how much of an increase is that?
- Current price
- $6.00
- Rival everyday price
- $5.50
- Variable cost per drink
- $1.50
- Current monthly gross profit
- $15,300
- Current monthly volume
- 3,400 drinks
1. Find contribution per drink at the matched price
Cutting price cuts contribution one for one, because variable cost does not move.
2. Find the volume that holds gross profit constant
Divide the gross profit the shop is trying to protect by the new, smaller contribution.
3. Compare that to current volume
Subtract to state the additional drinks the match would demand.
4. Express the requirement as a percentage
A percentage makes the size of the demand comparable to anything else the business is trying to grow.
Check answerHide answer
Answer
3,825 drinks, an increase of 425 or 12.5%. Matching would require 3,825 drinks a month, four hundred twenty-five more than today and 12.5 percent more volume, just to hold gross profit level.
Why it matters
A fifty cent cut looks small next to a six dollar price and is enormous next to a four dollar fifty contribution. Price the reflex before taking it. A price war rewards whichever side can lose money longer, and a four-hundred-location chain always can, so the arithmetic argues for competing on something the rival cannot copy.
Measuring a Strategy Against a New Competitor
Combine a decline in one channel with growth in another to judge whether a strategy worked.
April is the rival chain's first full month open. Counter volume falls ten percent from the October figure of three thousand four hundred drinks. Events and the new trailer add five hundred forty drinks across three bookings. Every drink is counted at the six dollar average. Find total volume and revenue for April, and state what the two numbers together show.
- October counter volume
- 3,400 drinks
- Counter decline
- 10%
- Event and trailer drinks
- 540
- Average price per drink
- $6.00
1. Apply the decline to the counter channel only
The decline is specific to walk-in demand, so it must not be applied to the event channel.
2. Add the event and trailer volume
Under this shop's convention, catered drinks are counted as drinks rather than reported on a separate revenue line.
3. Convert total volume to revenue
One average price covers both channels, which is what makes the addition in step two legitimate.
4. Read the two channels against each other
Report the channel that fell and the channel that grew, because the average alone hides both.
Check answerHide answer
Answer
3,600 drinks and $21,600 of revenue. April totals 3,600 drinks and $21,600 of revenue, the shop's best April on record, even though counter volume fell by three hundred forty drinks.
Why it matters
Both halves are true at once: the counter got harder and the business got bigger. That is what a strategy built on a strength the rival cannot copy is supposed to produce, and it is why a SWOT response is judged by results in the cell it targeted rather than by the headline total alone.
Key Terms
Practice Questions
4 questions. Nothing here is recorded or scored.
- Question 14.4.C.6, 4.4.D.3
Windlestraw Hitch Works
Sabina Vetter owns Windlestraw Hitch Works, a one-bay shop that installs trailer hitches and wiring harnesses on family vehicles. Customers pay one flat price per vehicle covering the hitch, the harness, and the labor to fit them, and most compare two or three shops online before they book. A customer who has paid a deposit to hold an appointment can cancel and take the job elsewhere at no charge up until the day the work starts. No single customer is more than a fraction of a percent of the shop's yearly installations, and a household buys a hitch once for a vehicle it already owns, so Sabina spends on local advertising each season to reach the next group of customers. A shop on the far side of town has begun advertising the same installation for 360 dollars against Windlestraw's 420, and Sabina is deciding whether to match that price. Her own installation numbers are in the table.
Figure | Amount Installation price | $420 Direct cost per installation | $180 Installations sold last year | 240 Rival shop's advertised installation price | $360 If Sabina matches the rival's 360-dollar price and her direct cost per installation stays where it is, how many more installations must Windlestraw sell in a year to hold last year's gross profit?
- A.About 80 more installations, roughly a 33 percent increase in installations sold.
- B.About 60 more installations, roughly a 25 percent increase in installations sold.
- C.About 40 more installations, roughly a 17 percent increase in installations sold.
- D.About 34 more installations, roughly a 14 percent increase in installations sold.
Check answerHide answer
Answer: A
- A.
- Correct. Gross profit per installation is price minus direct cost: 420 minus 180 is 240, and 240 installations at 240 dollars is 57,600 dollars of gross profit last year. Matching the rival leaves 360 minus 180, or 180 dollars per installation, so holding 57,600 dollars takes 57,600 divided by 180, which is 320 installations. That is 80 above last year's 240, an increase of about 33 percent. Pricing the reflex before taking it is the point of running the frameworks: matching is a response to a threat, and the arithmetic says the response has to be paid for with a third more vehicles through one bay, in a town where the number of households adding a hitch does not jump on command.
- B.
- This divides the lost gross profit by the old margin: 60 dollars given up on each of 240 installations is 14,400 dollars, and 14,400 divided by the old 240-dollar margin is 60 installations. That margin is gone the moment the price moves, and the replacement installations each carry 180 dollars, so it takes more of them than that.
- C.
- This holds revenue rather than gross profit: 420 times 240 is 100,800 dollars, and 100,800 divided by 360 is 280 installations. Revenue is not what the shop keeps. The 180 dollars of direct cost runs on every one of those extra installations, so revenue can be held while gross profit still falls.
- D.
- This matches the volume increase to the size of the price cut, since 60 dollars off 420 is about 14 percent. The cut lands entirely on the margin, because the direct cost per installation does not fall with the price, so the figure that has to be covered is the 25 percent drop in gross profit per installation, not the 14 percent drop in price.
- Question 24.4.A.6, 4.4.B.5
Figure | Amount Installation price | $420 Direct cost per installation | $180 Installations sold last year | 240 Rival shop's advertised installation price | $360 Which of the following best describes the power Windlestraw's customers hold to push its installation price down?
- A.Strong, because a town this size leaves customers few installers to choose from.
- B.Weak, because no single customer is more than a fraction of a percent of yearly installations.
- C.Weak, because a household buys one hitch installation and then leaves the market for good.
- D.Strong, because a customer can cancel a paid deposit and book a rival shop at no charge.
Check answerHide answer
Answer: D
- A.
- This counts the sellers when the force counts the buyers. Few installers in one town would, if anything, hand Windlestraw more room on price rather than less, and even that does not hold here, since a shop on the far side of town is advertising the same installation for 60 dollars less.
- B.
- This reads one determinant alone. Customer power is shaped by the number of customers, what they cost to acquire, and their switching costs, and a crowd of small buyers does point toward weak power. Here the switching cost is what decides the case, because a customer who walks costs Windlestraw the whole job whatever share of yearly installations that customer represents.
- C.
- One purchase per household is the reason acquisition costs are high, and high acquisition costs point toward strong customer power rather than weak. A buyer exercises power at the moment of the purchase, and this buyer is comparing two or three shops right then.
- D.
- Correct. Customer power is the buyers' power to drive prices lower, and switching costs, the money and mental friction of changing the product or brand bought, are the piece that bites here. A refundable deposit up to the day the work starts sets that cost near zero, customers already compare shops online before booking, and a rival is advertising the same installation for 60 dollars less across town.
- Question 34.4.C.3, 4.4.D.3
A specialty grain mill holds a patent on the milling process that gives its flour a texture competitors cannot legally reproduce. Sales have flattened because only two bakeries in its own city buy the flour. Which action best builds on the mill's strength?
- A.Price the flour below what nearby commodity mills charge in order to win local volume.
- B.Offer the flour in nearby cities so the patented texture reaches buyers who lack it.
- C.Move to the standard milling process larger mills run so that its costs match theirs.
- D.Wait for the two bakeries it supplies to grow so the flour reaches more customers.
Check answerHide answer
Answer: B
- A.
- This prices a differentiated product as though it were interchangeable. Intellectual property is what buys room to charge above the market, and cutting under commodity mills spends the advantage on a contest the mill has no cost position to win.
- B.
- Correct. Strengths are internal advantages, and intellectual property sits on that list beside brand recognition, product quality, and core competencies. Building on a strength means aiming it at the buyers who value it, and bakeries that cannot get this texture anywhere else are exactly those buyers. The patent travels to the next city; the two local accounts do not limit it.
- C.
- This trades away the one thing rivals cannot copy in order to chase a cost position larger mills already hold. Weaknesses are worth correcting where correction is affordable, and abandoning a protected process is the opposite of building on a strength.
- D.
- This waits on an external factor the mill does not control while the action open to it goes untaken. A SWOT is worth building only if each cell runs into something the business actually does.
- Question 44.4.C.5, 4.4.D.3
A small commercial cleaning company serves office buildings in one business district. The largest cleaning contractor in that district has announced it will stop serving buildings under 20,000 square feet next year. Which action best capitalizes on the announcement?
- A.Cut its crew size to match a district that will be buying less office cleaning.
- B.Hold its current accounts unchanged and wait for the district to settle down.
- C.Bid for the cleaning work at the small buildings the contractor plans to drop.
- D.Raise prices on its current accounts by the share the district is losing.
Check answerHide answer
Answer: C
- A.
- This reads reduced competition as reduced demand. The small buildings still need cleaning next year; what leaves the district is the company that was doing it, and the work stays behind.
- B.
- This treats beyond our control as nothing to do about it. External names where a factor comes from, not whether a business can respond, and the whole purpose of listing an opportunity is to act on it.
- C.
- Correct. Opportunities are external factors beyond a business's control that may contribute to its success, and reduced competition is one of them. An opportunity is worth listing only if the business can reach it, and small buildings are the size this company already cleans, so the contractor's exit leaves a set of buyers with a live need and no incumbent.
- D.
- This overreads the exit as pricing power. One contractor leaving the small-building segment does not make this company the only choice, and the same opening that lets it bid for new work lets other cleaners bid for its accounts.
In a class? These questions are not recorded.
Take the same questions as a scored quiz and your teacher will see that you have finished this section.
Take the scored quiz →10 Common Mistakes on 4.4
The wrong moves students actually make on these questions, why each one is wrong, and what to do instead. Part of the practice tier.
See what is includedCED Codes
4.4.A.1 · 4.4.A.2 · 4.4.A.3 · 4.4.A.4 · 4.4.A.5 · 4.4.A.6 · 4.4.A.7 · 4.4.B.1 · 4.4.B.2 · 4.4.B.3 · 4.4.B.4 · 4.4.B.5 · 4.4.B.6 · 4.4.C.1 · 4.4.C.2 · 4.4.C.3 · 4.4.C.4 · 4.4.C.5 · 4.4.C.6 · 4.4.D.1 · 4.4.D.2 · 4.4.D.3