# Porter’s Five Forces Analysis

Porter's Five Forces is a framework for analyzing a company's competitive environment. The number and power of a company's competitive rivals, potential new market entrants, suppliers, customers, and substitute products influence a company's profitability. This model identifies and analyzes five competitive forces that shape every industry and helps determine an industry's weaknesses and strengths. Five Forces analysis is frequently used to identify an industry's structure to determine corporate strategy. Porter's model can be applied to any segment of the economy to understand the level of competition within the industry and enhance a company's long-term profitability.&#x20;

### **Threat of New Entrants**

While the threat of new entrants is currently relatively weak, an economic upturn will inevitably change this position. The primary cause of this low entry threat is due to the current economy; difficulty in obtaining capital, retail and service industry bankruptcies combined with slow sales, little to no commercial construction, and strong rivalry among existing industry competitors. However, there are minimal barriers to entry (excluding required capital) and virtually no economies of scale or brand loyalty issues to contend with. Striving for maximum lease occupancy and carefully selecting companies that already possess consumer brand loyalty can overcome these obstacles.

### **Threat of Buyers**

The threat of buyers is strong. This industry heavily relies on the retail and service-oriented business industry. While consumers are not a primary threat here, they significantly influence business operations, in turn affecting the real estate operations industry. As a result, when consumers aren’t spending, and new businesses aren’t opening (or when they are closing) this industry suffers.

### **Threat of Suppliers**

The threat of suppliers is strong. While there are numerous suppliers to choose from, reducing their effective threat to the industry, there are also numerous inputs required in order for this industry to operate. Each input is vital for establishing and maintaining profitability within this industry. Banks and other private capital firms have an effect on this industry; in respect to whether or not it will finance the venture and at what cost they will lend the money.

Additionally, property owners have the power to control the cost of the real estate. Commercial real estate is significantly more expensive than residential real estate. The construction industry influences this industry as a result of material costs, wages, and again, financing. Investors also bear influence on publicly traded real estate operations corporations. If investors aren’t satisfied with the management of the company, market price will go down, influencing equity, and they will be reluctant to purchase newly issued shares and weary of other investment offerings from the company. Striving for maximum lease occupancy and carefully selecting companies that already possess consumer brand loyalty can overcome these obstacles.

### **Threat of Substitutes**

The threat of substitutes is moderate to weak. Most buyers within this industry choose to lease property because of the demographic and geographic advantages facilitated by the management company. Additionally, when comparing the cost to purchase prime real estate versus the cost to lease space, it is beneficial to lease. This particularly holds true for chain retailers that provide specialty products, requiring minimal space. Another substitute, or alternative, for this industry would be to establish a joint venture and privately own the business facility. Striving for maximum lease occupancy and carefully selecting companies that already possess

### **Threat of Rivalry**

The threat of rivalry is strong. This industry is divided into three segments; large-cap, medium-cap, and small-cap; determined by quantity of capital. At any moment a merger or acquisition could occur and in the current economic downturn, the corporations that are healthy and well-capitalized will not only persevere, but they are in position to acquire the weaker firms. Additionally, rivalry is strong due to the large number of firms and the difficulty to differentiate. Because real estate operations firms don’t offer a product, other than the facilities they lease, they rely on service; this can be difficult to quantify or differentiate. It should be noted that under normal economic conditions this industry is highly profitable. However, in the current economic crisis, there is minimal profitability and only companies with large cash reserves are likely to survive.
