Micro environment analysis examines the forces closest to your business that may affect—or be affected by—your decisions. Porter's 5 Forces is the most widely used framework for analyzing your competitive environment and making smarter business decisions.
In our Marketing Environment Analysis for Sri Lankan Business: Complete Beginner's Guide, we explained the 3 levels of business environment: internal (what you control), micro (your immediate market), and macro (big forces affecting everyone).
Today's focus: Understanding your Micro Environment using Porter's 5 Forces framework.
🎯 What You'll Learn
- Why Dialog dominates Sri Lankan telecom
- Why Keells can charge more than Cargills
- Why some businesses make profits while others struggle
- How to apply Porter's 5 Forces to YOUR business today
What Is Porter's 5 Forces?
Created by Harvard professor Michael Porter in 1979, this framework identifies the five competitive forces that squeeze your profits. Understanding these forces helps you see where threats come from and where opportunities exist.
The Core Logic
The stronger these 5 forces are in your industry, the harder you must fight for profits. Weak forces mean easier profits. Simple as that.
The 5 Forces at a Glance
Competitive Rivalry
How many competitors fight for the same customers?
Threat of New Entrants
How easily can new businesses start and compete with you?
Bargaining Power of Suppliers
Can suppliers force you to pay higher prices?
Bargaining Power of Buyers
Can customers force you to lower prices?
Threat of Substitutes
Can customers switch to completely different products?
Real Example 1: Sri Lankan Telecom Market
Let's analyze Dialog, Hutch, and Mobitel using Porter's 5 Forces to see how this framework works in practice.
Competitive Rivalry
⚠️ VERY HIGHCurrent Market Share (Estimated)
- Dialog: 57% (~17+ million subscribers)
- SLT-Mobitel: ~28%
- Hutch: ~10%
- Airtel: ~5% (merged with Dialog in 2024)
Why Competition Is Intense
All operators offer essentially the same thing: voice, data, and SMS. When products are identical, companies can only compete on price. The result? A constant race to the bottom.
This pattern repeats weekly. Each cycle squeezes profit margins thinner.
Additional Competitive Pressures
Market saturation: Sri Lanka has ~21.7 million people but approximately 30 million SIM cards (many people carry multiple SIMs). Finding new customers is nearly impossible—growth only comes from stealing competitors' customers.
High exit barriers: Dialog owns 4,000+ towers, kilometers of fiber cables, and hundreds of retail stores. They've invested billions of rupees. Even if profits shrink, they cannot simply close and leave.
💡 What This Means
Telecom companies must fight constantly just to maintain their customer base. There are no easy profits in this market.
Threat of New Entrants
✓ VERY LOWWhy New Telecom Companies Cannot Enter
Massive capital requirements: Building towers across Sri Lanka costs billions of rupees. Spectrum licenses cost hundreds of millions. Opening 1,000+ retail outlets requires enormous investment.
Government gatekeeping: The Telecommunications Regulatory Commission (TRCSL) must approve any new operator. You cannot simply decide to start a telecom company.
Brand trust takes decades: Dialog users have relied on Dialog for years. Switching to an unknown new operator feels risky. This psychological barrier protects incumbents.
First-mover advantages: Dialog launched 4G in April 2013—first in South Asia. They still maintain better 4G coverage than competitors. This head start creates lasting advantages.
No major new telecom operator has entered Sri Lanka in 10+ years
Instead, weaker players got absorbed. Hutch bought Etisalat in 2018. Dialog Axiata acquired Airtel Lanka in 2024. The industry is consolidating, not expanding.
💡 What This Means
Dialog, Mobitel, and Hutch don't worry about new giants entering. They only compete with each other. This is good news for their profit potential.
Bargaining Power of Suppliers
⚡ HIGHWho Supplies Telecom Companies?
- Network equipment manufacturers
- Tower construction companies
- SIM card manufacturers
Why Supplier Power Is High
Technological lock-in: Once a telecom operator builds their network using a particular technology, switching suppliers later becomes extremely expensive, time-consuming, and risky. This creates long-term dependence on existing suppliers.
Limited supplier options: Only a handful of global companies can supply complete telecom network solutions. Sri Lankan operators cannot easily switch or diversify their supplier base.
Foreign currency dependency: All major telecom equipment must be imported, requiring foreign currency. Exchange rate fluctuations and procurement delays significantly impact operational costs and planning.
💡 What This Means
Telecom operators must carefully manage supplier relationships, negotiate long-term contracts strategically, and accept that supplier bargaining power significantly affects their cost structure.
Bargaining Power of Buyers
⚡ HIGHWhy Customers Have Strong Power
Easy switching: Buy a new SIM and switch in 5 minutes. Or port your existing number in 24 hours (TRCSL allows this). No contracts lock customers in.
Price sensitivity: Sri Lankan consumers compare prices carefully. A Rs. 50 difference per month is enough reason for many to switch operators.
Instant information sharing: Bad packages or service experiences get exposed on Facebook and other social media immediately. Word spreads fast.
Multiple options: With three major operators actively competing for business, customers have real alternatives.
How Dialog Fights Buyer Power
Dialog's strategy is to make switching psychologically harder, even though it's physically easy. They invest in superior network coverage, create bundled packages, and build brand loyalty through consistent quality.
💡 What This Means
One bad experience can mean a lost customer. Telecom companies must treat every customer well, every time.
Threat of Substitutes
⚡ HIGHWhat Has Replaced Traditional Telecom Services?
Voice calls → WhatsApp/Zoom calls: Free internet calling has decimated traditional voice revenue.
SMS → WhatsApp messages: Who pays for SMS anymore? Almost nobody.
Mobile data at home → Fiber internet: SLT fiber offers unlimited data. Why use expensive mobile data when at home?
How Dialog Adapted
Dialog didn't fight the change—they embraced it. They completely shifted their business model.
Dialog's Revenue Mix (Estimated)
- 2013: 70% voice revenue, 30% data revenue
- 2025: 30% voice revenue, 70% data revenue
They transformed their entire business because voice and SMS were dying.
💡 What This Means
Watch for substitutes. Adapt fast or die slowly. Dialog's survival came from recognizing the threat early and pivoting aggressively.
Summary: Telecom Industry Analysis
| Force | Strength | Effect on Profits |
|---|---|---|
| Competitive Rivalry | VERY HIGH | Negative ⬇️ |
| Threat of New Entrants | VERY LOW | Positive ⬆️ |
| Supplier Power | HIGH | Negative ⬇️ |
| Buyer Power | HIGH | Negative ⬇️ |
| Threat of Substitutes | HIGH | Negative ⬇️ |
Overall verdict: Telecom is a hard industry for profits. Only the strongest survive. This explains why Dialog spends billions on network quality—they cannot afford to be second-best when four forces squeeze their margins.
Real Example 2: Keells vs Cargills Supermarkets
Same 5 forces framework. Different industry dynamics. Different strategic implications.
Competitive Rivalry
⚡ HIGHMajor Players
- Cargills Food City: 500+ stores nationwide
- Keells: 135+ stores
- Arpico: 100+ stores
- Laugfs Supermarket: Growing presence
- Lanka Sathosa: Government-backed stores
Why Competition Works Differently Here
Different target customers:
- Keells: Premium shoppers, Colombo-focused, imported products, higher prices
- Cargills: Value shoppers, all 25 districts, local products, lower prices
Geographic separation: Keells dominates Colombo and urban areas. Cargills covers all 25 districts. They don't directly compete in every location.
Different shopping missions:
- Big monthly stock-up → Cargills (cheaper, better bulk offers)
- Quick quality shop → Keells (better experience, wider import selection)
- Budget basics → Lanka Sathosa (government-subsidized prices)
💡 What This Means
Rivalry is HIGH, but smart positioning means both Keells and Cargills can survive and profit. They're not fighting for the exact same customer every time.
Threat of New Entrants
◐ MEDIUMWhy Opening Supermarkets Is Challenging
Significant capital requirements: High initial investment in outlets and inventory, necessity of building an efficient supply chain, investment in distribution warehouses.
Scale advantages favor incumbents: Keells buys from suppliers at much lower prices than you could negotiate for a single store. When they purchase for 135 stores, they have immense bargaining leverage.
Supply chain takes decades: Keells operates 9 collection centers and delivers fresh vegetables to stores within 24 hours from local suppliers. They built these farmer relationships over 30+ years.
Brand trust matters: "Keells" means quality. "Cargills" means value. A new name means zero trust—and trust takes years to build.
But Entry Is Still Possible
- SPAR International entered through Ceylon Biscuits (2019-2021)
- Daraz and PickMe started online grocery—a different model serving the same customer need
💡 What This Means
Established supermarkets have strong advantages, but innovative new models can still enter and survive.
Bargaining Power of Suppliers
✓ LOW to MEDIUMWho Supplies Supermarkets?
- Big brands: Unilever, Nestlé, Procter & Gamble
- Farmers: Fresh vegetables and fruits
- Importers: Foreign specialty products
Why Suppliers Have Limited Power
Big brands need supermarket shelf space: Unilever desperately needs Keells shelf space. They cannot easily reach Keells' 2.4+ million Nexus loyalty members without that partnership.
Fragmented farmer base: Cargills sources from 5,000+ individual farmers. No single farmer has the leverage to demand higher prices.
Keells to supplier: "Give us a better wholesale price, or we won't feature your product in our big sale promotion."
The supplier listens. Why? Because 2.4+ million Nexus members plus 135 stores equals reach they cannot ignore.
Exception: Premium imports that cannot be easily replaced give some suppliers more power.
💡 What This Means
Supermarkets largely control their supplier relationships. This is good for their profit margins.
Bargaining Power of Buyers
◐ MEDIUMWhy Buyers Have Some Power
Easy switching: Walk 500 meters in Colombo and find another supermarket.
Price comparison: Shoppers can easily remember Cargills' price while shopping at Keells.
Multiple alternatives: Traditional markets (pola), small corner shops, online delivery services all serve similar needs.
But Buyer Power Is Limited Because...
Time has value: Busy professionals will pay Rs. 50 extra rather than visit three different stores to find the best price on every item.
Quality trust: Middle-class families trust Keells won't sell expired or poor-quality products. Random shops? Less certainty.
Loyalty rewards work: Nexus members get Rs. 50-200 off on Rs. 3,000+ purchases. That discount creates switching costs.
Basket shopping realities: Nobody visits 5 different stores to save Rs. 200 total. The petrol cost would exceed the savings.
💡 What This Means
Customers can switch, but convenience and trust reduce their power over time. Building loyalty matters.
Threat of Substitutes
◐ MEDIUMWhat Can Replace Supermarkets?
Traditional markets (pola):
- ✓ Better vegetable prices, bargaining possible, personal relationships
- ✗ Inconvenient hours (5 AM), variable quality, not one-stop shopping
Small corner shops (kade):
- ✓ Walking distance, credit for regular customers
- ✗ Limited product range, no quality guarantees
Online grocery (Daraz, PickMe):
- ✓ Home delivery, easy price comparison
- ✗ Delivery fees, minimum order requirements, cannot select your own vegetables
Supermarkets Still Have Room to Grow
Supermarkets hold only 22-25% of total FMCG (Fast-Moving Consumer Goods) market share in Sri Lanka. Traditional shops still capture 75-78%.
According to Fitch Ratings, Sri Lanka's supermarket penetration is 15-17%, compared to 30% in similar developing countries. There's significant growth potential.
Why Substitutes Haven't Killed Supermarkets
Rising incomes: As people earn more, they increasingly value time over saving Rs. 50.
Urban lifestyles: Apartment residents and busy professionals cannot easily visit 5 AM vegetable markets.
Specialty products: Only supermarkets stock imported cheese, body lotions, premium cosmetics, and specialty items.
💡 What This Means
Traditional shops prevent supermarkets from overcharging, but the growing middle class is steadily shifting toward supermarket convenience.
How to Analyze YOUR Micro Environment
Copy this framework. Fill it in for your business. Be honest with your ratings.
📋 Porter's 5 Forces Analysis Worksheet
Force 1: Competitive Rivalry
Force 2: Threat of New Entrants
Force 3: Supplier Power
Force 4: Buyer Power
Force 5: Threat of Substitutes
Interpreting Your Results
Most forces HIGH: Tough industry, hard to make profits
Most forces LOW: Attractive industry, easier profits
Mixed results: Success depends on your specific strategy
Small Business Example: Café in Colombo
Let's apply the 5 Forces to a common Sri Lankan small business scenario.
Quick 5 Forces Assessment
Competitive Rivalry: HIGH
20+ cafés within 2km radius. Barista, Coffee Bean, plus numerous local cafés all competing for the same customers.
Threat of New Entrants: MEDIUM-HIGH
Starting costs range from Rs. 2-5 million. No special licenses required. New cafés open every month.
Supplier Power: LOW
Multiple coffee suppliers available. Easy to switch milk, sugar, and pastry providers.
Buyer Power: VERY HIGH
Customers can walk 100 meters to find another café. Students are extremely price-sensitive. One bad review spreads instantly on social media.
Threat of Substitutes: HIGH
Nespresso machines at home. Free office coffee. Strong Sri Lankan tea culture. Restaurant coffee sections.
Strategic Implications
Competing on price alone = failure. Too many competitors, too much buyer power, too many substitutes. You cannot win a price war.
Reduce rivalry through specialization: Be "the pour-over coffee experts" or "the best workspace café"—not just "another café."
Reduce buyer power through community: Build loyalty programs. Create signature drinks customers cannot find elsewhere. Make switching feel like losing something special.
Beat substitutes through experience: Offer what home coffee cannot—amazing workspace, unique blend discovery, or genuine community atmosphere.
This is Porter's 5 Forces in action. The framework reveals where to fight and where to differentiate.
5 Deadly Mistakes When Analyzing Your Micro Environment
❌ Mistake 1: Rating Everything "Medium"
Wrong: "Rivalry is medium, buyer power is medium, supplier power is medium..."
Why it fails: You learn nothing. No strategic decisions change. The analysis becomes useless.
Right: Be honest. Five main competitors fighting aggressively = rivalry is HIGH, not medium. Call it what it is.
❌ Mistake 2: Analyze Once, Never Again
Wrong: "We did this analysis in 2020. We're done."
Why it fails: Forces change constantly. COVID-19 transformed EVERY force within weeks. Your 2020 analysis is likely obsolete.
Right: Review quarterly at minimum. Track changes. Update your strategy accordingly.
❌ Mistake 3: Analysis Without Action
Wrong: "Interesting! Supplier power is high. Anyway, back to normal work..."
Why it fails: Analysis without action is wasted time and effort.
Right: Every analysis must conclude with "Therefore, we will..." Find backup suppliers. Renegotiate contracts. Develop innovative solutions.
❌ Mistake 4: Ignoring Early Signals
Wrong: "Only 5% of people use online grocery. Not a real threat yet."
Why it's dangerous: Substitutes always start small. By the time everyone uses them, you've already lost.
Right: Watch for small changes. Dialog didn't wait until everyone used WhatsApp to shift their strategy. They saw the signal early and pivoted to data.
❌ Mistake 5: Copying Competitors
Wrong: "Cargills opened 50 new stores. We should do the same!"
Why it fails: Your competitive forces may be completely different. Cargills benefits from massive economies of scale. Your business has different strengths and limitations.
Right: Analyze YOUR specific situation. Maybe your winning strategy is fewer stores in better locations, not copying Cargills' approach.
📅 Your Action Plan This Week
- High rivalry? → Differentiate your offering
- High buyer power? → Build customer loyalty
- High substitutes? → Adapt your product/service
- High supplier power? → Find alternative sources
- High new entrants? → Build competitive barriers
📚 Continue Your Learning
Next: PESTEL Analysis
Macro Environment Analysis examines government policies, economic trends, and technology changes affecting everyone. Porter's 5 Forces covers micro-level competitive forces. PESTEL covers macro-level forces. Together, they provide a complete strategic picture.
Coming Soon: VRIO Analysis
Analysis of your internal resources and capabilities. What makes your business uniquely competitive? Combined with Porter's 5 Forces and PESTEL, VRIO completes the strategic analysis trilogy.
Frequently Asked Questions
Q: How often should I conduct Porter's 5 Forces analysis?
Every 3 months minimum. More frequently if your industry changes rapidly (like technology sectors). Major disruptions like COVID-19 require immediate re-analysis.
Q: What if all 5 forces are HIGH for my business?
You're in a tough industry for profits. Either find a niche where forces are weaker, or seriously consider if this is the right business to pursue. Not every industry is worth entering.
Q: Can small businesses really use this framework?
Absolutely—it's actually MORE important for small businesses. You have less capital to waste on wrong strategies. This framework prevents expensive mistakes before they happen.
Q: What's the difference between alternatives and substitutes?
Alternatives: Different options within the same category. Example: Keells vs Cargills—both sell groceries, competing directly.
Substitutes: Products from different categories that satisfy the same underlying need. Example: Traditional markets (pola) aren't supermarkets, but people buy groceries there instead. WhatsApp calls aren't phone calls, but they replace the need for voice communication.
Q: Which of the 5 forces is most important?
Whichever is strongest in YOUR specific industry. There's no universal answer. For telecom, it's competitive rivalry and substitutes. For supermarkets, it's buyer alternatives. Your analysis will reveal your priority.
The Bottom Line
Porter's 5 Forces isn't classroom theory—it's business survival intelligence.
Dialog dominates telecom. Keells succeeds at premium. Cargills wins on value. They all understand their competitive forces intimately.
Companies that understand their competitive forces make smarter decisions.
Companies that ignore them waste money fighting unwinnable battles.
Micro environment analysis examines the forces closest to your business that may affect—or be affected by—your decisions. Porter's 5 Forces is the most widely used framework for analyzing your competitive environment and making smarter business decisions.
In our Marketing Environment Analysis for Sri Lankan Business: Complete Beginner's Guide, we explained the 3 levels of business environment: internal (what you control), micro (your immediate market), and macro (big forces affecting everyone).
Today's focus: Understanding your Micro Environment using Porter's 5 Forces framework.
🎯 What You'll Learn
- Why Dialog dominates Sri Lankan telecom
- Why Keells can charge more than Cargills
- Why some businesses make profits while others struggle
- How to apply Porter's 5 Forces to YOUR business today
What Is Porter's 5 Forces?
Created by Harvard professor Michael Porter in 1979, this framework identifies the five competitive forces that squeeze your profits. Understanding these forces helps you see where threats come from and where opportunities exist.
The Core Logic
The stronger these 5 forces are in your industry, the harder you must fight for profits. Weak forces mean easier profits. Simple as that.
The 5 Forces at a Glance
Competitive Rivalry
How many competitors fight for the same customers?
Threat of New Entrants
How easily can new businesses start and compete with you?
Bargaining Power of Suppliers
Can suppliers force you to pay higher prices?
Bargaining Power of Buyers
Can customers force you to lower prices?
Threat of Substitutes
Can customers switch to completely different products?
Real Example 1: Sri Lankan Telecom Market
Let's analyze Dialog, Hutch, and Mobitel using Porter's 5 Forces to see how this framework works in practice.
Competitive Rivalry
⚠️ VERY HIGHCurrent Market Share (Estimated)
- Dialog: 57% (~17+ million subscribers)
- SLT-Mobitel: ~28%
- Hutch: ~10%
- Airtel: ~5% (merged with Dialog in 2024)
Why Competition Is Intense
All operators offer essentially the same thing: voice, data, and SMS. When products are identical, companies can only compete on price. The result? A constant race to the bottom.
This pattern repeats weekly. Each cycle squeezes profit margins thinner.
Additional Competitive Pressures
Market saturation: Sri Lanka has ~21.7 million people but approximately 30 million SIM cards (many people carry multiple SIMs). Finding new customers is nearly impossible—growth only comes from stealing competitors' customers.
High exit barriers: Dialog owns 4,000+ towers, kilometers of fiber cables, and hundreds of retail stores. They've invested billions of rupees. Even if profits shrink, they cannot simply close and leave.
💡 What This Means
Telecom companies must fight constantly just to maintain their customer base. There are no easy profits in this market.
Threat of New Entrants
✓ VERY LOWWhy New Telecom Companies Cannot Enter
Massive capital requirements: Building towers across Sri Lanka costs billions of rupees. Spectrum licenses cost hundreds of millions. Opening 1,000+ retail outlets requires enormous investment.
Government gatekeeping: The Telecommunications Regulatory Commission (TRCSL) must approve any new operator. You cannot simply decide to start a telecom company.
Brand trust takes decades: Dialog users have relied on Dialog for years. Switching to an unknown new operator feels risky. This psychological barrier protects incumbents.
First-mover advantages: Dialog launched 4G in April 2013—first in South Asia. They still maintain better 4G coverage than competitors. This head start creates lasting advantages.
No major new telecom operator has entered Sri Lanka in 10+ years
Instead, weaker players got absorbed. Hutch bought Etisalat in 2018. Dialog Axiata acquired Airtel Lanka in 2024. The industry is consolidating, not expanding.
💡 What This Means
Dialog, Mobitel, and Hutch don't worry about new giants entering. They only compete with each other. This is good news for their profit potential.
Bargaining Power of Suppliers
⚡ HIGHWho Supplies Telecom Companies?
- Network equipment manufacturers
- Tower construction companies
- SIM card manufacturers
Why Supplier Power Is High
Technological lock-in: Once a telecom operator builds their network using a particular technology, switching suppliers later becomes extremely expensive, time-consuming, and risky. This creates long-term dependence on existing suppliers.
Limited supplier options: Only a handful of global companies can supply complete telecom network solutions. Sri Lankan operators cannot easily switch or diversify their supplier base.
Foreign currency dependency: All major telecom equipment must be imported, requiring foreign currency. Exchange rate fluctuations and procurement delays significantly impact operational costs and planning.
💡 What This Means
Telecom operators must carefully manage supplier relationships, negotiate long-term contracts strategically, and accept that supplier bargaining power significantly affects their cost structure.
Bargaining Power of Buyers
⚡ HIGHWhy Customers Have Strong Power
Easy switching: Buy a new SIM and switch in 5 minutes. Or port your existing number in 24 hours (TRCSL allows this). No contracts lock customers in.
Price sensitivity: Sri Lankan consumers compare prices carefully. A Rs. 50 difference per month is enough reason for many to switch operators.
Instant information sharing: Bad packages or service experiences get exposed on Facebook and other social media immediately. Word spreads fast.
Multiple options: With three major operators actively competing for business, customers have real alternatives.
How Dialog Fights Buyer Power
Dialog's strategy is to make switching psychologically harder, even though it's physically easy. They invest in superior network coverage, create bundled packages, and build brand loyalty through consistent quality.
💡 What This Means
One bad experience can mean a lost customer. Telecom companies must treat every customer well, every time.
Threat of Substitutes
⚡ HIGHWhat Has Replaced Traditional Telecom Services?
Voice calls → WhatsApp/Zoom calls: Free internet calling has decimated traditional voice revenue.
SMS → WhatsApp messages: Who pays for SMS anymore? Almost nobody.
Mobile data at home → Fiber internet: SLT fiber offers unlimited data. Why use expensive mobile data when at home?
How Dialog Adapted
Dialog didn't fight the change—they embraced it. They completely shifted their business model.
Dialog's Revenue Mix (Estimated)
- 2013: 70% voice revenue, 30% data revenue
- 2025: 30% voice revenue, 70% data revenue
They transformed their entire business because voice and SMS were dying.
💡 What This Means
Watch for substitutes. Adapt fast or die slowly. Dialog's survival came from recognizing the threat early and pivoting aggressively.
Summary: Telecom Industry Analysis
| Force | Strength | Effect on Profits |
|---|---|---|
| Competitive Rivalry | VERY HIGH | Negative ⬇️ |
| Threat of New Entrants | VERY LOW | Positive ⬆️ |
| Supplier Power | HIGH | Negative ⬇️ |
| Buyer Power | HIGH | Negative ⬇️ |
| Threat of Substitutes | HIGH | Negative ⬇️ |
Overall verdict: Telecom is a hard industry for profits. Only the strongest survive. This explains why Dialog spends billions on network quality—they cannot afford to be second-best when four forces squeeze their margins.
Real Example 2: Keells vs Cargills Supermarkets
Same 5 forces framework. Different industry dynamics. Different strategic implications.
Competitive Rivalry
⚡ HIGHMajor Players
- Cargills Food City: 500+ stores nationwide
- Keells: 135+ stores
- Arpico: 100+ stores
- Laugfs Supermarket: Growing presence
- Lanka Sathosa: Government-backed stores
Why Competition Works Differently Here
Different target customers:
- Keells: Premium shoppers, Colombo-focused, imported products, higher prices
- Cargills: Value shoppers, all 25 districts, local products, lower prices
Geographic separation: Keells dominates Colombo and urban areas. Cargills covers all 25 districts. They don't directly compete in every location.
Different shopping missions:
- Big monthly stock-up → Cargills (cheaper, better bulk offers)
- Quick quality shop → Keells (better experience, wider import selection)
- Budget basics → Lanka Sathosa (government-subsidized prices)
💡 What This Means
Rivalry is HIGH, but smart positioning means both Keells and Cargills can survive and profit. They're not fighting for the exact same customer every time.
Threat of New Entrants
◐ MEDIUMWhy Opening Supermarkets Is Challenging
Significant capital requirements: High initial investment in outlets and inventory, necessity of building an efficient supply chain, investment in distribution warehouses.
Scale advantages favor incumbents: Keells buys from suppliers at much lower prices than you could negotiate for a single store. When they purchase for 135 stores, they have immense bargaining leverage.
Supply chain takes decades: Keells operates 9 collection centers and delivers fresh vegetables to stores within 24 hours from local suppliers. They built these farmer relationships over 30+ years.
Brand trust matters: "Keells" means quality. "Cargills" means value. A new name means zero trust—and trust takes years to build.
But Entry Is Still Possible
- SPAR International entered through Ceylon Biscuits (2019-2021)
- Daraz and PickMe started online grocery—a different model serving the same customer need
💡 What This Means
Established supermarkets have strong advantages, but innovative new models can still enter and survive.
Bargaining Power of Suppliers
✓ LOW to MEDIUMWho Supplies Supermarkets?
- Big brands: Unilever, Nestlé, Procter & Gamble
- Farmers: Fresh vegetables and fruits
- Importers: Foreign specialty products
Why Suppliers Have Limited Power
Big brands need supermarket shelf space: Unilever desperately needs Keells shelf space. They cannot easily reach Keells' 2.4+ million Nexus loyalty members without that partnership.
Fragmented farmer base: Cargills sources from 5,000+ individual farmers. No single farmer has the leverage to demand higher prices.
Keells to supplier: "Give us a better wholesale price, or we won't feature your product in our big sale promotion."
The supplier listens. Why? Because 2.4+ million Nexus members plus 135 stores equals reach they cannot ignore.
Exception: Premium imports that cannot be easily replaced give some suppliers more power.
💡 What This Means
Supermarkets largely control their supplier relationships. This is good for their profit margins.
Bargaining Power of Buyers
◐ MEDIUMWhy Buyers Have Some Power
Easy switching: Walk 500 meters in Colombo and find another supermarket.
Price comparison: Shoppers can easily remember Cargills' price while shopping at Keells.
Multiple alternatives: Traditional markets (pola), small corner shops, online delivery services all serve similar needs.
But Buyer Power Is Limited Because...
Time has value: Busy professionals will pay Rs. 50 extra rather than visit three different stores to find the best price on every item.
Quality trust: Middle-class families trust Keells won't sell expired or poor-quality products. Random shops? Less certainty.
Loyalty rewards work: Nexus members get Rs. 50-200 off on Rs. 3,000+ purchases. That discount creates switching costs.
Basket shopping realities: Nobody visits 5 different stores to save Rs. 200 total. The petrol cost would exceed the savings.
💡 What This Means
Customers can switch, but convenience and trust reduce their power over time. Building loyalty matters.
Threat of Substitutes
◐ MEDIUMWhat Can Replace Supermarkets?
Traditional markets (pola):
- ✓ Better vegetable prices, bargaining possible, personal relationships
- ✗ Inconvenient hours (5 AM), variable quality, not one-stop shopping
Small corner shops (kade):
- ✓ Walking distance, credit for regular customers
- ✗ Limited product range, no quality guarantees
Online grocery (Daraz, PickMe):
- ✓ Home delivery, easy price comparison
- ✗ Delivery fees, minimum order requirements, cannot select your own vegetables
Supermarkets Still Have Room to Grow
Supermarkets hold only 22-25% of total FMCG (Fast-Moving Consumer Goods) market share in Sri Lanka. Traditional shops still capture 75-78%.
According to Fitch Ratings, Sri Lanka's supermarket penetration is 15-17%, compared to 30% in similar developing countries. There's significant growth potential.
Why Substitutes Haven't Killed Supermarkets
Rising incomes: As people earn more, they increasingly value time over saving Rs. 50.
Urban lifestyles: Apartment residents and busy professionals cannot easily visit 5 AM vegetable markets.
Specialty products: Only supermarkets stock imported cheese, body lotions, premium cosmetics, and specialty items.
💡 What This Means
Traditional shops prevent supermarkets from overcharging, but the growing middle class is steadily shifting toward supermarket convenience.
How to Analyze YOUR Micro Environment
Copy this framework. Fill it in for your business. Be honest with your ratings.
📋 Porter's 5 Forces Analysis Worksheet
Force 1: Competitive Rivalry
Force 2: Threat of New Entrants
Force 3: Supplier Power
Force 4: Buyer Power
Force 5: Threat of Substitutes
Interpreting Your Results
Most forces HIGH: Tough industry, hard to make profits
Most forces LOW: Attractive industry, easier profits
Mixed results: Success depends on your specific strategy
Small Business Example: Café in Colombo
Let's apply the 5 Forces to a common Sri Lankan small business scenario.
Quick 5 Forces Assessment
Competitive Rivalry: HIGH
20+ cafés within 2km radius. Barista, Coffee Bean, plus numerous local cafés all competing for the same customers.
Threat of New Entrants: MEDIUM-HIGH
Starting costs range from Rs. 2-5 million. No special licenses required. New cafés open every month.
Supplier Power: LOW
Multiple coffee suppliers available. Easy to switch milk, sugar, and pastry providers.
Buyer Power: VERY HIGH
Customers can walk 100 meters to find another café. Students are extremely price-sensitive. One bad review spreads instantly on social media.
Threat of Substitutes: HIGH
Nespresso machines at home. Free office coffee. Strong Sri Lankan tea culture. Restaurant coffee sections.
Strategic Implications
Competing on price alone = failure. Too many competitors, too much buyer power, too many substitutes. You cannot win a price war.
Reduce rivalry through specialization: Be "the pour-over coffee experts" or "the best workspace café"—not just "another café."
Reduce buyer power through community: Build loyalty programs. Create signature drinks customers cannot find elsewhere. Make switching feel like losing something special.
Beat substitutes through experience: Offer what home coffee cannot—amazing workspace, unique blend discovery, or genuine community atmosphere.
This is Porter's 5 Forces in action. The framework reveals where to fight and where to differentiate.
5 Deadly Mistakes When Analyzing Your Micro Environment
❌ Mistake 1: Rating Everything "Medium"
Wrong: "Rivalry is medium, buyer power is medium, supplier power is medium..."
Why it fails: You learn nothing. No strategic decisions change. The analysis becomes useless.
Right: Be honest. Five main competitors fighting aggressively = rivalry is HIGH, not medium. Call it what it is.
❌ Mistake 2: Analyze Once, Never Again
Wrong: "We did this analysis in 2020. We're done."
Why it fails: Forces change constantly. COVID-19 transformed EVERY force within weeks. Your 2020 analysis is likely obsolete.
Right: Review quarterly at minimum. Track changes. Update your strategy accordingly.
❌ Mistake 3: Analysis Without Action
Wrong: "Interesting! Supplier power is high. Anyway, back to normal work..."
Why it fails: Analysis without action is wasted time and effort.
Right: Every analysis must conclude with "Therefore, we will..." Find backup suppliers. Renegotiate contracts. Develop innovative solutions.
❌ Mistake 4: Ignoring Early Signals
Wrong: "Only 5% of people use online grocery. Not a real threat yet."
Why it's dangerous: Substitutes always start small. By the time everyone uses them, you've already lost.
Right: Watch for small changes. Dialog didn't wait until everyone used WhatsApp to shift their strategy. They saw the signal early and pivoted to data.
❌ Mistake 5: Copying Competitors
Wrong: "Cargills opened 50 new stores. We should do the same!"
Why it fails: Your competitive forces may be completely different. Cargills benefits from massive economies of scale. Your business has different strengths and limitations.
Right: Analyze YOUR specific situation. Maybe your winning strategy is fewer stores in better locations, not copying Cargills' approach.
📅 Your Action Plan This Week
- High rivalry? → Differentiate your offering
- High buyer power? → Build customer loyalty
- High substitutes? → Adapt your product/service
- High supplier power? → Find alternative sources
- High new entrants? → Build competitive barriers
📚 Continue Your Learning
Next: PESTEL Analysis
Macro Environment Analysis examines government policies, economic trends, and technology changes affecting everyone. Porter's 5 Forces covers micro-level competitive forces. PESTEL covers macro-level forces. Together, they provide a complete strategic picture.
Coming Soon: VRIO Analysis
Analysis of your internal resources and capabilities. What makes your business uniquely competitive? Combined with Porter's 5 Forces and PESTEL, VRIO completes the strategic analysis trilogy.
Frequently Asked Questions
Q: How often should I conduct Porter's 5 Forces analysis?
Every 3 months minimum. More frequently if your industry changes rapidly (like technology sectors). Major disruptions like COVID-19 require immediate re-analysis.
Q: What if all 5 forces are HIGH for my business?
You're in a tough industry for profits. Either find a niche where forces are weaker, or seriously consider if this is the right business to pursue. Not every industry is worth entering.
Q: Can small businesses really use this framework?
Absolutely—it's actually MORE important for small businesses. You have less capital to waste on wrong strategies. This framework prevents expensive mistakes before they happen.
Q: What's the difference between alternatives and substitutes?
Alternatives: Different options within the same category. Example: Keells vs Cargills—both sell groceries, competing directly.
Substitutes: Products from different categories that satisfy the same underlying need. Example: Traditional markets (pola) aren't supermarkets, but people buy groceries there instead. WhatsApp calls aren't phone calls, but they replace the need for voice communication.
Q: Which of the 5 forces is most important?
Whichever is strongest in YOUR specific industry. There's no universal answer. For telecom, it's competitive rivalry and substitutes. For supermarkets, it's buyer alternatives. Your analysis will reveal your priority.
The Bottom Line
Porter's 5 Forces isn't classroom theory—it's business survival intelligence.
Dialog dominates telecom. Keells succeeds at premium. Cargills wins on value. They all understand their competitive forces intimately.
Companies that understand their competitive forces make smarter decisions.
Companies that ignore them waste money fighting unwinnable battles.
