Porters Five Forces Model and the Industry Rivalry
Michael Porters five forces model is a theoretical framework for industry analysis and is a useful tool for strategic planning. It is used to assess the potential for profitability in an industry and helps to measure the intensity of competition within that industry. The five forces model comprises five factors to be considered when developing a strategic position. These factors are: supplier power, buyer power, barriers to entry, threat of substitutes, and industry rivalry. By applying the five forces model to a company or an industry, the company can identify the key elements needed to enhance its competitive position.
Supplier power measures the influence suppliers have on the industry rivalry. The strength of supplier power depends upon a number of factors including the number of suppliers, the number of suppliers relative to buyers, the bargaining strength of suppliers, and the availability of substitute suppliers. For example, if there are very few suppliers that control a dominant market share, they have considerable bargaining power. This can increase the costs associated with the purchase of raw materials.
Buyer power measures the influence buyers have on the industry rivalry. The factors used to measure buyer power include the number of buyers, the number of buyers relative to suppliers, the bargaining power of buyers, and the availability of substitute goods. Buyers are more powerful when there are several buyers and few suppliers. This is due to the increased bargaining power buyers have when there is an abundance of buyers for a limited number of suppliers.
Barriers to entry into an industry measure the difficulty that new competitors will have in gaining market share. Barriers to entry can be environmental, regulatory, or technological. High environmental, regulatory, or technological barriers to entry can create an advantage for existing firms as they are less likely to be subject to competition from new market entrants.
Threat of substitutes measure the likelihood of substitution of the product or service a company provides. The threat is higher when there is a good substitute product or service in the market. Substitution increases the competition within the industry, which reduces the level of profitability firms can achieve.
Industry rivalry measures the intensity of competition between companies within the same industry. This is usually caused by a high number of competitors and equally balanced levels of product differentiation and strategic advantages. Price competition is common in highly competitive markets as firms try to gain market share.
In summary, Porters five forces model is a useful tool for assessing the potential for profitability within an industry. The five forces measure the intensity of competition of suppliers, buyers, barriers to entry, substitutes, and industry rivalry. Companies can use the five forces to identify the elements needed to enhance their competitive position. By doing so, companies can position themselves to achieve a lasting competitive advantage in their industry.
