…a strategic framework developed by Michael Porter to analyze and understand industry competition and profitability
. The five forces are: the threat of new entrants, the threat of substitute products or services, the bargaining power of suppliers, the bargaining power of buyers (customers), and the intensity of rivalry among existing competitors. By evaluating these forces, businesses can assess market attractiveness and formulate strategies to improve their competitive position.
The Five Forces Explained
- Threat of New Entrants
- This force assesses how easy or difficult it is for new companies to enter a market.
- High barriers to entry, such as high capital requirements, established brand loyalty, or proprietary technology, make it harder for new entrants, thus reducing the threat.
- Threat of Substitute Products or Services
- This force examines the likelihood that customers will switch to alternative products or services that fulfill the same need.
- A high threat of substitutes can limit a company's ability to raise prices.
- Bargaining Power of Suppliers
- This force determines the power suppliers have to raise input prices or reduce the quality of their goods and services.
- Suppliers have greater power if there are few of them, their products are unique, or switching costs for buyers are high.
- Bargaining Power of Buyers
- This force assesses how much power customers have to drive down prices.
- Buyers have more power if there are few of them, they buy in large volumes, or there are many alternative suppliers or products.
- Rivalry Among Existing Competitors
- This force considers the intensity of competition among current firms in the industry.
- High rivalry can lead to price wars and increased competition for market share.
How to Use the Model
- Identify the competitive forces: Pinpoint the key players and factors within each of the five forces in your specific industry.
- Evaluate the strength of each force: Determine how strong each force is and how it affects competition and profitability.
- Formulate strategy: Use this information to develop strategic plans that can improve your company's position within the industry and protect it from competitive pressures.