Porter’s Five Forces
Porter’s five forces refer to a model that is used in identifying and analyzing the five competitive forces that together, shape an industry. It is also used in determining the strengths and weaknesses of an industry.
Who developed Porter’s five forces model and when
This model was developed by Michael E Porter in 1979. Porter was an economist of the Harvard University’s Business School. His aim was to come up with a framework that would be used in evaluating and assessing the position and competitive strength of an organization or business. The basis of this model is the concept that the attractiveness and competitive intensity of any market is determined by five forces. The five forces of this model help a business in identifying where exactly the power lies in an industry. Porter suggested that there is an identical profitability source in every industry. As such, profitability and competition are ultimately driven by the industry structure rather than whether a service or product is produced by that industry, whether the industry is mature or emerging, whether it is low-tech or high-tech and whether it is unregulated or regulated.
What are the five forces of in this model?
According to Porter, competition in an industry is shaped by the following forces:
The main driver in an industry is the capability and number of competitors in a market. Market attractiveness is reduced by many competitors who offer undifferentiated services and products. Thus, competition rivalry is high in a market or industry that has few businesses that are equally selling a service or product and when there is a growth in the industry and consumers are able to switch competitors with ease.
Suppliers bargaining power
This force determines how easily suppliers can drive prices up. It is driven by the total suppliers’ number for each input, service or product uniqueness, relative strength and size of a supplier as well as the cost involved in switching between suppliers. This force essentially analyzes the power that a supplier has as well as the control that a supplier has on prices, which can in turn lower the profitability of a business.
Consumers’ bargaining power
This force entails the ability of consumers to drive prices of commodities down. This force is driven by the importance of every individual buyer to an organization, the number of people buying a commodity in a market, and the cost involved when buyers switch between suppliers. Basically, the force analyzes the power that consumers have and how it affects quality and pricing. The power of consumers is high where they are not many and when switching a service or a product is easy.
New entrants’ threat
New entrants are attracted by profitable markets. This erodes the profitability of the market. Profitability is always bound to decline until it reaches a competitive rate unless the incumbents have durable and strong barriers to industry or market entry. Such barriers include patents, high capital requirements, government policies and economies of scale. It can be argued that trade policies and taxation make the government act like a sixth force in many industries.
When there are close substitutes in a market, the likelihood of switching alternatives increases in response to increases in prices. This reduces the market’s attractiveness and suppliers’ power.
Why is the Porter’s five forces model important?
This model is very important for entrepreneurs looking for insights into the prospects of their existing companies or businesses and those with questions regarding the industry or market competition. This model can answer these questions when used properly. Essentially, the model enables entrepreneurs to understand factors that affect profitability in their target industry and it can also inform their decision making in relation to their prospective investment sectors.
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