Porter's Five Forces

 Porter's Five Forces

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. 

These five forces help us to identify ‘attractive’ and ‘unattractive’ industries. 

This is because these five forces have the potential to negatively affect profitability. 

For instance, a market that has a high threat of new entrants will see existing businesses lose market share and profitability.

The five forces identified are 

 Threat of new entrants. 

Potential entrant is the major source of competition in the industry. 

The product range, quality, capacity, etc. brought by them, increases competition. 

The size of the new entrant plays a major role here, i.e. the bigger the entrant, the more intense is the competition. 

 Time and cost of entry

 Economies of scale

 Cost advantages 

 Technology protection

 Barriers to entry

 Low amount of capital is required to enter a market; 

  There is no government regulation; 

There is low customer loyalty; 

• Bargaining power of suppliers.

• There are few suppliers but many buyers; 

Supplier power

Number of suppliers

 Uniqueness of service

 Size of suppliers

 Few substitute raw materials exist;

  Bargaining power of buyers

• Buying in large quantities or control many access points to the final customer;

 • Only few buyers exist;

  Number of customers

  Size of each order

 • There are many substitutes; 

  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. 

Substitute performance

 Cost of change

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.