Porter Five Forces Analysis is a technique used to evaluate the competitive competitive forces that influence and dictate the competitive environment of an industry. This technique is helpful for businesses, analysts, and strategists in understanding the factors that affect the attractiveness of a particular market or industry. The five forces in Porter’s Five Forces model are threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes and rivalry among existing players.
Threat of New Entrants:
The threat posed by potential competitors is the most significant external force to a company’s success. Potential new entrants could potentially erode the profits from the existing companies. There are several factors that can determine the extent to which the entry of a new entrant can affect an industry. A high capital requirement for setting up production facilities, high customer loyalty/brand presence, capability/know-How, economies of scale and a strong reputation are all factors which could give an incumbent an advantage over new entrants.
Bargaining Power of Buyers:
This refers to the power of buyers to influence cost, quality outcomes from a producer. It is determined by the buyer’s ability to switch between suppliers and the cost associated with doing so. For example, buyers can exercise greater bargaining power if the switching cost is low and there are a lot of potential suppliers. When the cost of switching between suppliers is low, buyers can pressure suppliers to cut their unit cost and/or offer better service and quality.
Bargaining Power of Suppliers:
This refers to the power of the suppliers to influence price and related outcome from the buyer. The bargaining power of the suppliers is determined by their ability to deny access to essential resources needed by the buyer, their ability to offer differentiated products to reduce switching cost and/or their ability to substitute inputs when necessary. Suppliers also enjoy market power if they are in a stronger position than their customers in terms of information access and technology.
Threat of Substitutes:
A substitute is product or service that can be used as an alternative to the primary product or service in question. Substitutes can be similar to or different than the original product or service but they fill the same purpose. The threat of substitutes is an important consideration because if buyers perceive that they can find a better or cheaper alternative to the existing product or service then they are likely to switch to this alternative.
Rivalry Among Existing Players:
The level of competition in an industry is determined by the presence of a large number of competitors, the presence of multiple competitors with similar resources and capabilities and the presence of strong market leaders. When there are a large number of competitors, the industry becomes more competitive as each competitor fights for a share of the market. When there are multiple competitors with similar resources and capabilities, it increases the level of rivalry as companies compete for the same share of the market. The presence of strong market leaders increases the level of competition as competitors try to gain an edge over their rivals in an effort to capture a greater share of the market.
The Porter Five Forces model is a useful tool for understanding the competitive environment of an industry. It can help companies to identify which competitive forces pose a threat to their business and how they can position themselves to compete in the market. Furthermore, by taking into account all of the five forces, companies can develop strategies that will allow them to gain an advantage over their competitors and create value for their customers.
