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Volume 75%: Porter's Five Forces

Porter's Five Forces model identifies and analyzes five competitive forces that shape every industry: the threat of new entrants, the power of suppliers and customers, and the threat of substitute products. The model was created by Michael Porter and is used to determine an industry's weaknesses and strengths. It helps companies analyze their competitive environment and guide strategic decisions to improve profitability.

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97 views

Volume 75%: Porter's Five Forces

Porter's Five Forces model identifies and analyzes five competitive forces that shape every industry: the threat of new entrants, the power of suppliers and customers, and the threat of substitute products. The model was created by Michael Porter and is used to determine an industry's weaknesses and strengths. It helps companies analyze their competitive environment and guide strategic decisions to improve profitability.

Uploaded by

Devojit Bora
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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What Are Porter's Five Forces?

Porter's Five Forces is a model that identifies and analyzes five


competitive forces that shape every industry and helps determine an
industry's weaknesses and strengths. Five Forces analysis is frequently
used to identify an industry's structure to determine corporate strategy.
Porter's model can be applied to any segment of the economy to
understand the level of competition within the industry and enhance a
company's long-term profitability. The Five Forces model is named after
Harvard Business School professor, Michael E. Porter.

Volume 75%
 
1:44

Porter's Five Forces

Understanding Porter's Five Forces


Porter's Five Forces is a business analysis model that helps to explain
why various industries are able to sustain different levels of profitability.
The model was published in Michael E. Porter's book, "Competitive
Strategy: Techniques for Analyzing Industries and Competitors" in
1980. The Five Forces model is widely used to analyze the industry
structure of a company as well as its corporate strategy. Porter identified
five undeniable forces that play a part in shaping every market and
industry in the world, with some caveats. The five forces are frequently
used to measure competition intensity, attractiveness, and profitability of
an industry or market.

Porter's five forces are:

1. Competition in the industry

2. Potential of new entrants into the industry

3. Power of suppliers

4. Power of customers
5. Threat of substitute products

KEY TAKEAWAYS

 Porter's Five Forces is a framework for analyzing a company's


competitive environment.

 The number and power of a company's competitive rivals,


potential new market entrants, suppliers, customers, and substitute
products influence a company's profitability.

 Five Forces analysis can be used to guide business strategy to


increase competitive advantage.
Competition in the Industry
The first of the five forces refers to the number of competitors and their
ability to undercut a company. The larger the number of competitors,
along with the number of equivalent products and services they offer,
the lesser the power of a company. Suppliers and buyers seek out a
company's competition if they are able to offer a better deal or lower
prices. Conversely, when competitive rivalry is low, a company has
greater power to charge higher prices and set the terms of deals to
achieve higher sales and profits.

Potential of New Entrants Into an Industry


A company's power is also affected by the force of new entrants into its
market. The less time and money it costs for a competitor to enter a
company's market and be an effective competitor, the more an
established company's position could be significantly weakened. An
industry with strong barriers to entry is ideal for existing companies
within that industry since the company would be able to charge higher
prices and negotiate better terms.

Power of Suppliers
The next factor in the five forces model addresses how
easily suppliers can drive up the cost of inputs. It is affected by the
number of suppliers of key inputs of a good or service, how unique these
inputs are, and how much it would cost a company to switch to another
supplier. The fewer suppliers to an industry, the more a company would
depend on a supplier. As a result, the supplier has more power and can
drive up input costs and push for other advantages in trade. On the other
hand, when there are many suppliers or low switching costs between
rival suppliers, a company can keep its input costs lower and enhance its
profits.

Power of Customers
The ability that customers have to drive prices lower or their level of
power is one of the five forces. It is affected by how many buyers or
customers a company has, how significant each customer is, and how
much it would cost a company to find new customers or markets for its
output. A smaller and more powerful client base means that each
customer has more power to negotiate for lower prices and better deals.
A company that has many, smaller, independent customers will have an
easier time charging higher prices to increase profitability.

 
The Five Forces model can help businesses boost profits, but they must
continuously monitor any changes in the five forces and adjust their
business strategy.
Threat of Substitutes
The last of the five forces focuses on substitutes. Substitute goods or
services that can be used in place of a company's products or services
pose a threat. Companies that produce goods or services for which there
are no close substitutes will have more power to increase prices and lock
in favorable terms. When close substitutes are available, customers will
have the option to forgo buying a company's product, and a company's
power can be weakened.

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