Definition of Porter’s Five Forces
Porter’s Five Forces model is defined as an analysis tool that utilizes total five industry forces to decide the intensity regarding the competition in the industry as well as the level of profitability.
Understanding the tool
This tool was established in 1979 by M. Porter to understand the way that how the five key competitive forces are impacting an industry. The five forces that are detected in this involve:
- Industry rivalry: The major driver is defined as the number as well as capability related to the competitors in the business environment or market. There are several companies that are offering undifferentiated services and products that will also decrease the market attractiveness.
- Bargaining power regarding suppliers: It is an assessment that how simple it is for the suppliers to drive up the prices. It is driven by the uniqueness related to the service or product; a total number of suppliers of every necessary input; relative size & strength of the supplier and cost related to switches from one supplier to another.
- Threats of substitutes: Where close substitute services or products exist in the market, it increases the likelihood of consumers switching to the alternatives in response to the increases in the price. It decreases the power related to the suppliers as well as attractiveness regarding the market.
- The threat of entry: Profitable markets attract some new entrants that corrode the profitability. Unless incumbents have durable and strong barriers to the entry.
- Bargaining power of buyers: It is an assessment that how simple it is for the buyers to drive up the prices. It is driven by the number of buyers in the market, significance of every buyer to the company as well as the cost of buyer regarding switching between the suppliers.
These all the forces determine the structure of the industry as well as the competition level in that particular industry. The stronger competitive forces in the industry are very less profitable it is.
Utilizing the tool
Different steps that need to be used while using Porter’s five forces framework are as follows:
Collect the information on all the five forces
Analyze the outcomes as well as display all the results on the diagram
Formulate the strategies based on the depictions or conclusions
What are the benefits provided by Porter’s Five Forces analysis?
Porter’s Five Forces analysis assists the companies to understand the factors influencing the profitability in a specific industry and can also assist to inform the decisions regarding:
- whether to enter into one specific industry
- whether to enhance the capability in one specific industry
- developing the competitive strategies
Some points that need to take for Porter’s Five Forces analysis are as follows:
- Use this particular model where there are near about three competitors in the market
- Consider the influence that government has on the industry
- Consider the industry lifecycle stage that means the earlier stages will be more unstable
- Consider the changing/dynamic characteristics regarding the industry
There are total five forces that are detected that determine the long-term profitability related to market segment or market.
- Supplier Concentration
- The significance of volume to the supplier
- Differentiation of inputs
- Influence of inputs on differentiation or cost
- Presence of substitute inputs
- Threat or risk related to forward integration
- Cost relative to the total purchases in the industry
- Bargaining leverage
- Buyer information
- Buyer volume
- Brand identity
- Substitutes available
- Buyers’ incentives
- Price sensitivity
- The threat of backward integration
- Product differentiation
- Buyer concentration vs industry
- Absolute cost benefits
- Proprietary learning curvature
- Access to an input
- Government or some other binding policy
- Economies related to scale
- Capital needs
- Brand detection
- Switching costs
- Access to the distribution
- Expected retaliation
- Proprietary products
- Switching costs
- Buyer inclination to detect the alternatives
- Trade-off regarding the available substitute services or products
- Exit barriers
- Industry concentration
- Fixed costs
- Perceived value add
- Growth of industry
- Overcapacity status
- Brand detection
- Diversity of rivals
- Corporate stakes
- Service level compared to others
- Added value perceptions
- Dynamics with some other attributes