Porter's Five Forces Example: One Transaction, Two Worlds

You pay for a flight with a card. One transaction, two companies, two entirely different businesses: in 2024 the airline kept about one and a half cents of every dollar of revenue, while the card network kept close to 55 cents. The product is not the difference. The difference is how many directions the market presses from: rivals, substitutes, customers, regulation and the bargaining power of suppliers, which is usually the direction nobody sees coming. What follows is a Porter's five forces example read off real margins, not off a checklist.

Same transaction, two worlds#

Start with the mechanism, because a number without one is trivia. An airline sits where several currents converge at once.

Customers compare prices to the cent in a single browser tab, since an economy seat looks the same everywhere. Fuel is priced by a market the carrier does not influence. The workforce is essential and organised. A plane costs the same whether it flies full or half empty. And the industry has a habit of ordering new aircraft exactly at the top of the cycle, right before the downturn.

American Airlines Group reported record 2024 revenue of $54.2 billion and net income of $846 million. That is 1.6% of a record year left inside the company, and a few percent on the fuel price eats the whole cushion. Demand for flying is strong, the product is needed, and the profit from it is thin.

On the other side of the same transaction sits the card network. For the fiscal year ended September 2024, Visa reported $35.9 billion of net revenue and $19.7 billion of net income. So close to 55 cents of every dollar stays in the company, because Visa does not lend the money, does not carry the default risk, and takes a fraction of whatever flows across its infrastructure. Pressure exists here too: regulators watch transaction fees, and new payment rails try to route around the cards. It just arrives from two directions instead of six.

Product quality does not explain that gap, because both companies do their job well. Neither does demand, because the stage of a category is settled separately and demand for flying is strong.

Porter's five forces, minus the checklist#

The frame that organises this came from Michael Porter in 1979, in How Competitive Forces Shape Strategy. Five forces do the pushing: rivalry among existing players, the threat of new entrants, substitutes, the bargaining power of buyers and the bargaining power of suppliers. Almost every textbook example reaches for the same industry, aviation, and for good reason, since it takes hits from all five sides at once. Nearly half a century on, the frame still works, because it does not describe a fashion, it describes arithmetic: each force either takes a slice of the price or adds to the cost.

The trouble is that five boxes are easy to tick and easy to walk away from empty-handed. The question is not whether a force exists, because it always does. How many of them press at the same time, and which one sets the price?

The force people skip most often is the threat of new entrants, because it shows up in no line of any statement. It works even when nobody enters: a company that raised its list price by a third would be inviting a competitor in, so it does not raise it. The question about barriers to entry is therefore a question about a bill. How much would it cost to build the same thing from zero, and how many years would it take. When the answer is "a fortune and a decade", that is an advantage no rival can rebuild in a few years, seen from the side of the whole industry rather than one company.

The bargaining power of suppliers lands in cost first#

A supplier has power when there are few of them and their input cannot be swapped quickly for something equally good. Revenue can then keep rising while the margin falls, because a cost increase enters the income statement immediately, while a price increase needs the customer to agree. That gap in timing is the whole mechanism.

Companies admit this themselves, in the one document their lawyers have to sign. Apple puts it plainly in its fiscal 2024 annual report: "Because the Company currently obtains certain components from single or limited sources, the Company is subject to significant supply and pricing risks". A company that keeps 24 cents of every dollar of sales is telling you that on some components the price is set jointly with somebody on the other side of the table.

The reading rule is short. Count the suppliers of the one input without which the product does not exist. One supplier is a price risk, two is a negotiation, ten is ordinary procurement. And watch for the supplier that does not look like one: the app store the entire sale runs through, the narrow engineering specialism half the industry is bidding for, the landlord who raises the rent at every renewal.

The trace of this force lands in gross margin faster than anywhere else, because the cost of the input sits in exactly that line. A company whose gross margin falls for a third straight quarter while revenue grows usually does not have a selling problem. It has a buying problem.

The customer who sets your price#

From the front, the customer pushes, and the bigger the customer, the harder. A grocery chain extracts discounts from a food producer, a corporation negotiates software prices to the bone, and hospitals and insurers co-decide pricing in healthcare. The revenue concentration you can see in the filings turns into leverage at the table.

Say three customers account for 60% of a company's revenue. Lose one and a fifth of sales goes with them, and both sides know it before they sit down to talk about next year's pricing. The discount the company then grants has no line of its own in the income statement.

It is called a lower margin.

One thing weakens customer power: switching cost. A customer who would have to migrate data, retrain a team and live with outage risk for a quarter negotiates more quietly than one who changes vendor with a click. So the question about customers has two halves: how big are they, and how expensive is it for them to leave.

A substitute does not look like the product#

Substitutes are the most frequently missed force, because people look for them among companies with a similar logo. A substitute solves the same problem by a different route and usually arrives from outside the category. A games console competes not only with another console but with a series and with a walk outside, because it is fighting for the same two evening hours. A carrier on a business route sometimes loses not to a cheaper airline but to a video call that drops the cost of the trip to zero. A food producer competes with the retailer's private label and with a customer who decided to cook.

The control question is brutal, which is why it works: if this company's product vanished from the market tomorrow, what would the customer actually choose? If the answer is "they would wait", there is no substitute. If the answer is "they would buy the thing next to it", the price list does not belong to the company.

Substitutes are also quiet, because they have no name, no market share and no press office. Nobody reports the share of "cooking at home" in the ready-meals market, or the share of "not this year" in the car market. Yet those two behaviours set the ceiling on price in both industries.

Regulation has a seat at the table#

Regulation can set a price without asking the company's opinion. Sometimes it is a shield: licences, permits and capital requirements raise the entry threshold so high that a new player quits before finishing the maths.

Sometimes it is a ceiling instead: capped prices, fee limits, compliance costs that grow after every crisis.

So with a protected position I ask two questions instead of one. What does the company pay for that protection, and who can change it within a single electoral term.

Regulation is also the only one of these forces that moves by a decision taken outside the market, which means no player controls it. The company files it high up where it has to list what could damage it, and almost never in the investor deck.

Who collects the profit in the chain#

The pressure map has a sequel, because money in a value chain does not spread evenly and rarely stays where the work happens. Hon Hai, the largest contract manufacturer in electronics, reported NT$6.86 trillion of 2024 revenue and NT$152.7 billion of profit attributable to owners, a 2.2% net margin. Over the same period Apple kept $93.7 billion of $391.0 billion in sales, which is 24%.

On every dollar of its own sales one side keeps two cents and the other keeps twenty-four, and the physical assembly happens on the first side.

The factory sweats, the logo earns.

Profit settles where the customer comes for the name rather than for the execution. A contract manufacturer is replaceable, because it competes on price and spare capacity, and it knows that at every tender. The owner of the brand and the operating system is not, because the queue forms for it.

Competition can be excellent for the customer and miserable for the owner at the same time, and there is no contradiction in that. Lower prices and faster launches improve the buyer's life with exactly the move that shaves the seller's margin. Industry analysis does not moralise about it. It only asks which side of that move the company you are reading stands on.

Market share is not a defence#

Nokia wrote this in its 2007 annual report: "our estimated full-year global market share was 38%", on 437 million devices shipped, with an estimated share of around 50% in the smartphone segment. Nearly two phones in five sold worldwide were its own. A year later the market started to change, and the share was not the problem; the problem was that it defended nothing.

The second mistake is drawing the competitive circle too tight. Analyse a streaming service only against other streaming services and you miss the real fight, the one for attention and for the household budget. The third mistake is counting competitors instead of watching how they behave. One player who cuts prices or adds capacity changes the arithmetic for everyone, and a player funded by an owner willing to subsidise losses for years can break the economics of an entire category.

A competitor's behaviour often matters more than its size. A rational player defends its own returns and does not wreck the price list it lives on. A player chasing share at any cost can sell below cost for three years and take everyone's margin down on the way.

Industry analysis is the study of behaviour, not a census.

Pressure shows up before the margin#

The margin falls last, so waiting for it means reading the signal late. The first thing to crack is the cost of acquiring a customer.

Say winning one paying customer used to cost 300 zlotys and two years later costs 450, with the subscription unchanged at 100 zlotys a month. Payback on acquisition stretches from three months to four and a half, while the income statement still shows nothing, because revenue grows alongside the marketing budget. That is what crowding looks like before anyone calls it a price war.

Several signals belong to the same family: a longer sales cycle, promotions in a quarter that never had them, a discount for paying a year upfront, a trial extended from fourteen days to thirty. Each says the same thing.

The same customer costs more today.

The same number works in the other direction, and that is its best part. When acquisition cost falls at an unchanged price, either somebody just left the market or the product started selling itself. Both show up in the table before they show up in management commentary.

When this map misleads#

We could stop here in theory. In practice the pressure map has two weaknesses, and it is better to know both before leaning on it.

The first: it is a photograph, and pressure moves. A brutal industry can win its margin back as weaker players leave and capacity comes off the market. A calm one stops being calm after a single product launch. So the map needs a date on it, and the question is not "how is it", but "which way is it going?".

The second: the map describes a structure, not a single company. Within the same industry one company holds its price list and another gives it away, and the map does not show that. Other tools do: a moat tells you what defends a particular company, and the stage of the industry's life tells you whether there is anything worth defending.

I do not know whether the card networks will hold their position through the next decade. I do know what will settle it: the share of payments that bypass their rails, and what regulators do with fees. I will check that in the same filings a year from now.

Describe the industry without the word "competitive"#

There is one discipline that separates analysis from an impression: describe the industry in a single sentence without using the word "competitive". Instead of "the industry is highly competitive" you get "customers compare prices in one browser tab and pay nothing to switch, so the fight happens entirely on margin". Or "the largest cloud providers can bundle this feature for free into a contract the customer already signed". A sentence like that tells you what to check next quarter. A label tells you nothing.

And always name the axis of comparison: price, quality, scale, geography, technology. "Better" with no axis attached is a feeling, not a finding.

The map itself fits on one sheet of paper and takes fifteen minutes:

1. Write down three rivals fighting for exactly the same customer.
2. Add two substitutes from outside the category.
3. Name one place where the customer dictates terms.
4. Name one input whose supplier cannot be swapped quickly.
5. Write down one rule that could change after an election or an agency decision.

Under each point add one sentence on how that force could press on revenue or on margin. Then circle the point you understand least. That circle is your research gap, handed to you for free.

Where to find this in the annual report#

The annual report is a better source here than any service with ready-made analysis, because management describes the competition it genuinely worries about. The most honest part is usually the risk factors: that is where, in careful legal language, a company admits that rivals have deeper pockets, that a component comes from one source, or that a rule may move.

Earnings calls add tone. If the chief executives of three competing companies complain about a "promotional environment" in the same quarter, that is not a coincidence, it is a price war nobody wants to name.

And when you want to know which side of the table the price list sits on, the pricing power test comes down to one question: does price rise while volume holds. I do not believe the sentence "the industry is competitive" without a named axis and one number beside it.

Competitor materials are worth as much, because only a comparison exposes how each firm counts. If everyone in the market claims to be number one, check by which measure: one leads on revenue, another on units, a third in a single region. Those differences say more about strategy than many a slide deck.

In Taufolio this map lives in the Full report: competitive position and industry context are two of the 25 points a company is broken into there, and pressure also shows up in the point on risks. What those points look like on a finished document is visible in the example reports.

A pressure map is worth something only with a date on it. Draw one yourself once, and a competitor's product launch stops being the news of the day and becomes an update to something you already have on paper.