An model to identiy moats and better understand a companies position in the value chain

Porter's five forces model is a tool that helps businesses to understand the competitive environment in which they operate and develop an understanding of how attractive the industry or market is. It was developed by Michael Porter, also known as one of the greatest minds in business management. The model was initially designed to help airlines compete with other carriers in an increasingly complex global marketplace. However, the model has been applied to industries beyond commercial aviation, including healthcare, telecommunications, and retailing.

Porter’s model was created to provide a framework for assessing the attractiveness of an industry. It is designed to help companies decide where to compete and where not to compete. This can be done by determining whether the firm has an advantage over its competitors or if it should focus on niche markets instead.

The theory also helps companies determine their strategic positioning, which

impacts resource allocation decisions and competitive strategy development.

Porter’s five forces model is a framework that helps businesses determine the profitability of an industry and the likelihood of achieving a competitive advantage within that industry. Michael E. Porter developed the five forces model and provides an outlook for analyzing an industry's attractiveness and position in other sectors.

The five forces are:

Existing competition - How does it look against the existing competition? Is the market fragmented, or has one clear leader?

Competitive rivalry is a measure of the extent of competition among existing firms. There are several competitive moves that may limit profitability and lead to competitive activities (Dhliwayo, Witness 2022). These actions include price cuts, increased advertising expenditures, and investments in service/product enhancements and innovation. A company's competitiveness is primarily determined by the intensity of its competitive rivalry in most industries. Having an understanding of industry rivals is vital to successfully marketing a product. A product's positioning is determined by how the public perceives it and what distinguishes it from its competitors. An organization must monitor the marketing strategies and pricing of competitors, and any changes should be addressed promptly.

Competition among competitors is fierce, and industry profitability is low due to the following factors:

Threat of new threats - As new entrants seek to gain market share, they pressure existing organizations. This puts pressure on prices, costs, and the rate of investment needed to sustain a business within the industry. If new entrants enter a new market from an existing one is, the threat exceptionally high as it can leverage the existing expertise, cash flow, and brand identity, which pressures the current company’s profitability.

Barriers of entry will reduce the threat of new entrants. Meanwhile, if the barriers are low, it will be the opposite, and new entrants can flood the market. Michael E. Porter lists seven major sources of barriers to entry.

going and to deliver a product before any revenues can be produced. Clearly, the Internet has influenced this factor dramatically, and Websites and apps can be launched cheaply and easily as opposed to the brick-and-mortar industries of the past.

A substitute product uses a different technology to solve the same economic need. Examples of substitutes are meat, poultry, and fish; landlines and cellular telephones; airlines, automobiles, trains, and ships; beer and wine; and so on. For example, tap water is a substitute for Coke, but Pepsi is a product that uses the same technology (albeit different

ingredients) to compete head-to-head with Coke, so it is not a substitute. Increased marketing for drinking tap water might "shrink the pie" for both Coke and Pepsi. In contrast, increased Pepsi advertising would likely "grow the pie" (increase consumption of all soft drinks) while giving Pepsi a larger market share at Coke's expense.

Potential factors:

however, contractual and legal barriers are also practical.

The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes. Firms can take measures to reduce buyer power, such as implementing a loyalty program. Buyers' power is high if buyers have many alternatives, and it is low if they

have few choices.

Potential factors:

chicken run with the suppliers as the margins are so small.

meanwhile some products actually go up in demand with price increases. Important to look at the price dynamics.

The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm when there are few substitutes. If you are making biscuits and there is only one person who sells flour, you have no alternative but to buy it from them. Suppliers may refuse to work with the firm or charge excessively high prices for unique resources.

Potential factors:

important input of its product. If the labor market is out of balance, can, the employee raises the salary claims, and the personnel costs will increase. Labor unions will also be impacting this factor.

Applications and research

Porter’s model has been applied to several industries beyond the airline industry. For example, it has been used to study the competitiveness of U.S.-based firms in a globalized economy (Wilmot et al., 2002) and to analyze changes in labor costs over time (Mitchell & Neumann, 2005). The model has also been used as part of a research agenda on global strategy (Bryant & O'Reilly-Porter 2008).

Using Porter's Five Forces Analysis can help identify potential threats or opportunities for

an organization and factors that may affect its success at achieving its goals. Such analyses can provide insight into how competitive forces within an industry might affect competition between firms operating within that same industry; therefore allowing organizations to

understand better where they stand relative to others competing against them for them to achieve their objectives more successfully.

The Porter Diamond of National Advantage

The Porter Diamond of National Advantage is a way to visualize the five forces:

The quality dimension is represented by the strength of competition in each industry. If there's low competition, you can expect that your competitors will have more inferior quality products or services than yours will be able to provide at competitive prices. On the other hand, if there are many competing firms in the industry but few of them are

profitable enough to survive over time (i.e., survive without being bought out by larger companies), then this can lead them down a path towards failure because they won't be able to keep up with their competition while also having enough customers left over after all their

competitors have disappeared from existence! In other words: no matter how hard we work at being efficient cleaners who provide high-quality service every time we wash our customers' windows -- even if our competitors do all sorts of things wrong like charging customers much more money than they should charge us ($$$) -- eventually someone

else comes along who offers better deals on chemicals used during cleaning services...

How to use it in investing analysis?

Porter’s Power Model serves as a good tool for where to look for moats. Moats as a definition produce long-term profits and protect the market share of the company. This is what the Power Model analyzes. How a company can protect its market share, and margins, and keep growing. Porter has laid out which five players matters for this analysis: Rivals, suppliers,

customers, new entrants, and substitutions. If you figure out a company can keep its advantage against these five players will probably your company have a wide moat. Would still be a pretty wide moat if the company can have an advantage over three of these players, but the advantage is not black or white as you can understand by the potential factors listed above.

Let’s look at a highly qualitative company that all know about Apple (we focus on the iPhone for simplicity's sake). Apple’s bargaining power against customers is very high, there are only one phone made with IOS and only a few models. Bargaining power against suppliers is another thing, quality is a very important part of the experience of the iPhone. So Apple can’t go anywhere to source its parts due to the quality aspects, meanwhile, Apple is a huge player in the smartphone so it would be very high volumes and a big deal for a supplier. Then look at the competition, all other phones are made with another operating system which is a huge competitive advantage as the customers get used to how the phone works creating switching costs to an android phone for example. Samsung and other players have tried to make the switch easier with apps that transfer info from iPhone.

The smartphone market has very low barriers of entry to keep new entrants out, as there are no regulations for permits or patents holding companies out. But there is quite substantial capital that is needed to start producing phones and significant volumes before making a profit.

Looking at OnePlus approached it in the beginning with a prepaid model, pay the phone first then they build it and ship it. Much like a Kickstarter campaign. Substitution to a smartphone is a little hard to narrow in on as the smartphone does so many things today. But many are the smartphone used for communication through regular phone services such as calls, text messages, messenger apps, social media, and so on. Today may the camera in the phone be very well included in the communication part, as nobody would want to send a bad picture. Is there any other product that could satisfy this need of the smartphone? Maybe the computer and tablet, but they are not as portable as a smartphone resulting in worse performance in terms of availability and ease of substitution.

Conclusion

Porter’s model has been applied to several industries beyond the airline industry. For example, it has been used in the automobile industry to analyze competitive forces and how they affect market share. It is usually used by business actors, meanwhile, an investor can use it to identify moats against these five forces which can hurt a company’s margins and market share. Being a very powerful tool, when searching for quality in companies.

Stay hungry and keep hunting!

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