Porter’s Five Forces Model is very qualitative in nature. It does incorporate some quantitative factors but for the most part, it is a very subjective approach. This post attempts to set quantitative assessment of Porter’s five forces.
A general check point before you begin Porter five force quantitative analysis, one should be able to clearly articulate and understand the economics behind the business of the firm which you are evaluating
Use the below template to analyse five forces
| Porter Force | How to Analyse | |
| Threat of Entry | Economies of Scale | See if the per unit / tonne cost is going down with capacity expansion |
| Check if company can outsource non core operations, that should improve gross margins | ||
| Check average capex requirements, this should be trending down | ||
| Product differentiation | Check competitor prices of products, Is it a price maker or taker in the industry | |
| Look at EBIDTA margin, A company with EBIDTA margin is likely to have differentiated product | ||
| Check Sales price per piece if applicable and compare it to competitor | ||
| Cost advantages | Compare net profit margin with peers, stack the competitors from high to low in terms of net margin | |
| Distribution Channels | For consumer goods company or companies selling through agents, Compare with nearest competitors | |
| Government policy | Check for licensing requirements for business to operate, this can create huge moat | |
| Intellectual Property | Look for patents, copyrights, trademarks, and operating rights that protect a firm’s process. Watch year on year spent on R&D and Advertisement & promotion |
|
| Power of suppliers | See for cash advances from suppliers / distributors | |
| See if Trades payable are improving | ||
| Many suppliers or single supplier to firms , Single supplier will likely to have bargaining power viz many suppliers | ||
| Power of buyers | Type of purchases – concentrated or in large volumes | |
| Sold to consumer or business, if sold to business is it significant to their operations ? | ||
| Threat of substitutes | See ROE/ROC of the business, Monitor industry developments and breakthroughs | |
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Download template Porter and start analysing companies, in a follow up post I will cover an example
Happy Investing
The fifth force of Porters framework is missing in the template shared in excel sheet namely “Competitive Rivalry” . Looking forward to see the post with examples 🙂