Porter’s Five Forces

Download

Porter’s Five Forces is a framework developed by Michael E. Porter in 1979 to analyze the competitive environment of an industry. It helps to assess the intensity of competition and the profitability potential within an industry. The five forces are:

1. Threat of New Entrants: This force examines how easy or difficult it is for new competitors to enter the industry. Factors like capital requirements, economies of scale, and regulatory barriers impact this threat. If entry barriers are low, new entrants can quickly enter the market, increasing competition.
2. Bargaining Power of Suppliers: This force analyzes the power of suppliers in an industry. If suppliers are few and offer unique or essential products, they can exert significant control over prices and terms, squeezing the profitability of companies within the industry.
3. Bargaining Power of Buyers: This force assesses the influence customers have over prices and quality. When buyers are concentrated, have many options, or can switch products easily, they can demand lower prices or higher quality, impacting industry profits.
4. Threat of Substitute Products or Services: This force considers the availability of alternative products or services that can fulfill the same need as the industry's offerings. The easier it is for customers to switch to substitutes, the higher the competition and the lower the industry profitability.
5. Industry Rivalry: This force measures the degree of competition among existing firms in the industry. High rivalry, often due to a large number of competitors, slow industry growth, or high exit barriers, can lead to price wars, advertising battles, and innovation races, all of which can reduce profitability.

Together, these forces determine the competitive landscape and profitability potential of an industry, guiding strategic decisions for businesses operating within it.