The “Five Forces” model by Michael Porter is a tool used for analyzing the competitive environment within an industry. It identifies five key forces that determine the competitive intensity and attractiveness of a market.
These forces are…
- Threat of new entrants – This force assesses how easy or difficult it is for new competitors to enter the market. High barriers to entry, such as high capital requirements or strong brand loyalty, can deter new entrants and protect existing companies’ market share.
- Bargaining power of buyers – This force examines the power held by buyers/customers to negotiate prices, demand better quality, or seek alternative products or services. When buyers have high bargaining power, they can drive down prices and squeeze profit margins.
- Bargaining power of suppliers – This force assesses the power held by suppliers to influence prices, terms, and quality. If suppliers have significant power, they can raise prices or reduce the quality of inputs, affecting the profitability of the firms they supply.
- Threat of substitute products or services – This force considers the availability of alternative products or services that can fulfill the same need as the company’s offerings. The higher the availability and attractiveness of substitutes, the more pressure there is on companies to differentiate their products or services.
- Intensity of competitive rivalry – This force evaluates the level of competition among existing firms in the industry. Factors such as the number of competitors, their market share, and the rate of industry growth can impact the intensity of rivalry. High rivalry often leads to price wars, reduced profit margins, and increased marketing expenses.
By analyzing these five forces, businesses can understand the competitive dynamics of their industry better and formulate strategies to position themselves advantageously within the market.