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Porter's Five Forces Model

Porter's five forces model is an analysis tool that uses five competitive forces - threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitutes, and rivalry among existing competitors - to determine the intensity of competition in an industry and its profitability level. The model identifies factors that influence the competitive intensity and profitability of an industry. A sixth force of complements was later proposed as products that increase demand when used together can increase industry profits.

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809 views2 pages

Porter's Five Forces Model

Porter's five forces model is an analysis tool that uses five competitive forces - threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitutes, and rivalry among existing competitors - to determine the intensity of competition in an industry and its profitability level. The model identifies factors that influence the competitive intensity and profitability of an industry. A sixth force of complements was later proposed as products that increase demand when used together can increase industry profits.

Uploaded by

Harsh Anchalia
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© © All Rights Reserved
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Porter’s five forces model

It 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:

1. 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 deter new entrants. Threat of new
entrants is high when:
 Low amount of capital is required to enter a market;
 Existing companies can do little to retaliate;
 Existing firms do not possess patents, trademarks or do not have established brand reputation;
 There is no government regulation;
 Customer switching costs are low;
 There is low customer loyalty;
 Products are nearly identical;
 Economies of scale can be easily achieved.

2. 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;
 Suppliers are large and threaten to forward integrate;
 Few substitute raw materials exist;
 Suppliers hold scarce resources;
 Cost of switching raw materials is especially high.

3. 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 other supplier are low;
 They threaten to backward integrate;
 There are many substitutes;
 Buyers are price sensitive.

4. 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.
5. 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.

Although, Porter originally introduced five forces affecting an industry, scholars have suggested
including the sixth force: complements. Complements increase the demand of the primary product with
which they are used, thus, increasing firm’s and industry’s profit potential. For example, iTunes was
created to complement iPod and added value for both products. As a result, both iTunes and iPod sales
increased, increasing Apple’s profits.

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