5 Forces Model
A means of providing corporations with an analysis
of their competition and determining strategy,
Porter’s five-forces model looks at the strength of five
distinct competitive forces, which, when taken together,
determine long-term profitability and competition
The key forces driving industry competition are the following:
- industry competitors (rivalry among existing firms);
- potential entrants (threat of new entrants);
- suppliers (bargaining power of suppliers);
- buyers (bargaining power of buyers);
- substitutes (threat of substitute products or services) .
Threat of entry. New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources. The threat of entry into an industry depends on the barriers to entry that are present, coupled with the reaction from existing competitors that the entrant can expect. The major sources of barriers to entry are the following: economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, cost disadvantages independent of scale, government policy.
Industry competitors. Intensity of rivalry is the result of a number of interacting factors (numerous or equally balanced competitors, slow industry growth, high fixed or storage costs, lack of differentiation or switching costs, capacity augmented in large increments, diverse competitors, high strategic stakes, high exit barriers).
Substitutes. Substitute products that deserve the most attention are those that 1) are subject to trends improving their price-performance tradeoff with the industry product, or (2) are produced by industries earning high profits.
Buyers. Buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other.
Suppliers. Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods and services .
⠀ Childress, B. (2006). Porter’s 5-forces model In M. M. Helmes (Ed.). Encyclopediaofmanagement (5thed., pp. 670-672).FarlingtonHills : ThomsonGale (P. 670)
⠀ Porter, M. E. (1998). Competitivestrategy. Techniquesforanalyzingindustriesandcompetitors. NewYork : FreePress (p. 4)
⠀ Porter, M. E. (1998). Competitivestrategy. Techniquesforanalyzingindustriesandcompetitors. NewYork: FreePress (p. 7-27)