When you’re analysing a company as a possible investment, it’s easy to get lost in a pool of financial ratios and quarterly earnings. But what about the bigger picture - the competitive environment that shapes those numbers?
That’s where Porter’s Five Forces comes in.
Developed by Michael Porter, a former Professor at Harvard Business School, this five-point framework helps investors understand the structural forces that drive business performance.
Let’s apply it to Unilever, one of the world’s largest consumer goods companies, to see how the model works in practice. And five takeaways that investors can use with any company.
This article is not personal advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.
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Competition – high risk
Unilever operates in the fast-moving consumer goods (FMCG) sector, where competition is intense.
Its rivals include Procter & Gamble, Nestlé, Colgate-Palmolive, and Johnson & Johnson. These companies fight for shelf space, brand loyalty, and pricing power across categories like personal care, home care, and food.
The challenge? Low switching costs for consumers.
If Dove shampoo gets pricey, shoppers can easily grab Pantene or a private-label alternative. This constant battle forces Unilever to invest heavily in marketing, innovation, and sustainability initiatives to maintain its customers.
Investor takeaway
If rivalry is high, expect volatility and lower profitability. Look for companies with strong brands or differentiated products to offset this pressure.
Threat of new entrants – low risk, but creeping up
Building a global giant like Unilever isn’t easy.
Barriers to entry are high. Brand equity, distribution networks, and economies of scale take decades to build. Regulatory compliance and marketing budgets add further hurdles.
That said, digital channels have lowered entry costs for niche brands. Startups can now sell direct-to-consumer via e-commerce and social media, nibbling at market share in premium or sustainable product segments.
Investor takeaway
High barriers to entry like patents, scale advantages, or regulatory hurdles, are a moat. Companies in such industries often enjoy more stable returns.
Bargaining power of suppliers – low risk
Unilever sources raw materials like palm oil, tea, and packaging from a vast global network of over 55,000 suppliers. While this diversification reduces dependency, certain commodities, like sustainable palm oil, are concentrated among a few producers, giving them some leverage.
Unilever mitigates this through long-term contracts, vertical integration, and sustainability programs.
For example, it owns or partners in parts of its agricultural supply chain and invests in renewable energy for its factories.
Investor takeaway
Companies with diversified supply chains or vertical integration are better positioned to protect margins.
Bargaining power of buyers – high risk
Unilever sells to retail giants and e-commerce platforms.
These large buyers can negotiate aggressively on price and shelf placement. On the consumer side, switching costs are near zero, and shoppers are price-sensitive, especially in emerging markets.
To counter this, Unilever leans on brand loyalty and product differentiation. Its portfolio includes household names like Dove and Hellmann’s - brands that command trust and justify a premium.
Investor takeaway
Look for businesses with sticky products or high switching costs.
Threat of substitutes – moderate risk
Substitutes aren’t just rival brands - they’re alternative solutions.
For Unilever, this could mean homemade cleaning products, generic brands, or even lifestyle shifts (e.g. consumers moving from packaged foods to fresh, local options).
The risk is amplified by low switching costs and the rise of private labels, which often undercut branded products on price. Unilever combats this through innovation and sustainability positioning, appealing to consumers who value ethical sourcing and eco-friendly packaging.
Investor takeaway
Companies in industries with few substitutes (e.g. defence or water utilities) should have a lower risk of their customers switching to similar products or services.
Why does it matter for investors?
Porter’s Five Forces shows why Unilever’s scale and brand power are critical to its resilience.
While rivalry and buyer power are strong headwinds, high barriers to entry and strategic supplier management provide stability.
This isn’t just an academic exercise - it’s a way to assess industry attractiveness and company resilience.
A firm operating in a high-margin industry with strong barriers to entry and limited substitutes is likely to deliver more sustainable returns.
Next time you’re evaluating a stock, don’t just look at the P/E ratio. Consider:
How intense is competition?
Can new players easily enter?
Who has the power – suppliers or buyers?
Are there substitutes lurking?
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