Porter's Five Forces Model Is An Analysis Tool That Uses Five Industry Forces To

Porter’s five forces model
Porter’s five forces model is an analysis tool that uses five industry forces to
determine the intensity of competition in an industry and its profitability level.
Five forces model was created by M. Porter in 1979 to understand how five key
competitive forces are affecting an industry. The five forces identified are:
These forces determine an industry structure and the level of competition in that
industry. The stronger competitive forces in the industry are the less profitable it is.
An industry with low barriers to enter, having few buyers and suppliers but many
substitute products and competitors will be seen as very competitive and thus, not so
attractive due to its low profitability.
It is every strategist’s job to evaluate company’s competitive position in the industry
and to identify what strengths or weakness can be exploited to strengthen that
position. The tool is very useful in formulating firm’s strategy as it reveals how
powerful each of the five key forces is in a particular industry.
Threat of new entrants. This force determines how easy (or not) it is to enter a
particular industry. If an industry is profitable and there are few barriers to enter,
rivalry soon intensifies. When more organizations compete for the same market
share, profits start to fall. It is essential for existing organizations to create high
barriers to enter to discourage new entrants. Threat of new entrants is high when:
• Low amount of capital is required to enter a market;

• Existing firms do not possess patents, trademarks or do not have established brand
reputation;
• There is no government regulation;
• There is low customer loyalty;
• Products are nearly identical;
• Economies of scale can be easily achieved.
Bargaining power of suppliers. Strong bargaining power allows suppliers to sell

higher priced or low quality raw materials to their buyers. This directly affects the
buying firms’ profits because it has to pay more for materials. Suppliers have strong
bargaining power when:
• There are few suppliers but many buyers;

• Few substitute raw materials exist;
• Suppliers hold scarce resources;
• Cost of switching raw materials is especially high.
Bargaining power of buyers. Buyers have the power to demand lower price or
higher product quality from industry producers when their bargaining power is strong.
Lower price means lower revenues for the producer, while higher quality products
usually raise production costs. Both scenarios result in lower profits for producers.
Buyers exert strong bargaining power when:
• Buying in large quantities or control many access points to the final customer;
• Only few buyers exist;
• Switching costs to another supplier are low;
• There are many substitutes;
• Buyers are price sensitive.
Threat of substitutes. This force is especially threatening when buyers can easily
find substitute products with attractive prices or better quality and when buyers can
switch from one product or service to another with little cost. For example, to switch
from coffee to tea doesn’t cost anything, unlike switching from car to bicycle.
Rivalry among existing competitors. This force is the major determinant on how
competitive and profitable an industry is. In competitive industry, firms have to
compete aggressively for a market share, which results in low profits. Rivalry among
competitors is intense when:
• There are many competitors;
• Exit barriers are high;
• Industry of growth is slow or negative;
• Products are not differentiated and can be easily substituted;
• Competitors are of equal size;
• Low customer loyalty.
Porter's Five Forces Factors
Threat of new entry
• Amount of capital required

• Retaliation by existing companies
• Legal barriers (patents, copyrights, etc.)
• Brand reputation
• Product differentiation
• Access to suppliers and distributors
• Economies of scale
• Sunk costs
• Government regulation
Supplier power
• Number of suppliers
• Suppliers’ size
• Ability to find substitute materials
• Materials scarcity
• Cost of switching to alternative materials
• Threat of integrating forward
Buyer power
• Number of buyers
• Size of buyers
• Size of each order
• Buyers’ cost of switching suppliers
• There are many substitutes
• Price sensitivity
• Threat of integrating backward
Threat of substitutes
• Number of substitutes
• Performance of substitutes
• Cost of changing
Rivalry among existing competitors
• Number of competitors
• Cost of leaving an industry
• Industry growth rate and size
• Product differentiation
• Competitors’ size
• Customer loyalty
• Threat of horizontal integration
• Level of advertising expense

Porter's Five Forces Model Is An Analysis Tool That Uses Five Industry Forces To

Uploaded by

Copyright:

Available Formats

Porter's Five Forces Model Is An Analysis Tool That Uses Five Industry Forces To

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Porter's Five Forces Model Is An Analysis Tool That Uses Five Industry Forces To

Uploaded by

Copyright:

Available Formats

Porter’s five forces model

• Low amount of capital is required to enter a market;

Bargaining power of suppliers. Strong bargaining power allows suppliers to sell

• There are few suppliers but many buyers;

Porter's Five Forces Factors

Threat of new entry

• Amount of capital required

Rivalry among existing competitors

You might also like