Porter’s Five Competitive Forces Model

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Porter’s Five Forces
The Porter’s five forces analysis is simple but a powerful tool or framework that attempts to analyze the level of competition within a business strategy development and industry or it is a tool that for understanding where power lies in a business situation. This powerful tool useful, because it helps you understand both strength of your current competitive position, and strength of a position you’re considering moving into. It draws upon industrial organization (IO) economics to obtain five forces that establish the competitive strength and as a result attractiveness of an Industry. Attractiveness in this context refers to the general industry profitability. An “unattractive” industry is one in which the combination of these Porter’s five forces acts to make down overall profitability. A very unattractive industry would be one forthcoming “pure competition”, in which obtainable profits for all firms are driven to normal profit. This analysis is associated with its principal innovator Michael E. Porter of Harvard University.

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Porter’s Five Forces: 
• Existing competitive rivalry between suppliers.
• Threat of new market entrants.
• Bargaining power of buyers.
• Power of suppliers.
• Threat of substitute products (including technology change)

How can I use Porters five Forces?
To apply Porter’s Five Forces, you need to work through these questions for each area:

Force 1: Threat of New Entry?
Force 2: Buyer Power?
Force 3: Threat of Substitution?
Force 4: Supplier Power?
Force 5: Competitive Rivalry?
Threat of New Entry 
If new businesses can be simply started up in your sector without substantial investment – then this is a threat. The Internet has made this a reality in many sectors, especially publishing! So ask yourself the questions:

  • What is the threat of new businesses starting in this sector?
  • What are the rules and regulations?
  • How easy is it to start up in this business?
  • What finance would be needed to start-up?
  • Are there barriers to entry which give you greater power?

Buyer Power
Where there are fewer buyers, they often control market. Some questions here include:

  • How many are there?
  • How powerful are the buyers?
  • Can the buyers get costs down?
  • Do they have the power to dictate terms?

Threat of Substitution
If there are available alternatives then the threat of substitution increases.

  • Can it be outsourced? Or automated?
  • How easy is it to find an alternative to this product or service?

Supplier Power
Markets where there are few suppliers’ means the suppliers retain the power

  • Are there a few who control prices?
  • Or many so prices are lower?
  • Examine how many suppliers are in the market?
  • Do your suppliers hold the power?
  • How easy is it to switch, what’s the cost?

Competitive Rivalry
Markets, where there are few competitors are good-looking but can be short-lived. These are greatly competitive markets with many companies chasing the similar work reduce your power in the market.

  • What’s the level of competition in this sector?
  • What’s the competitor situation? Many competitors and you’re all in a commodity situation or a few?

Examples Of How Porter’s Five Forces Can Be Applied To A Business?
If you are thinking about your business of moving into new sectors or markets, or if your business is stuck in a product/ commodity situation, then Porter’s Five Forces enables you to see the issues clearly.
Work through each of the forces to recognize in your present sector and your potential sectors, to see who has the power.
Here are some examples of where the stability of power lies in different markets
1. Threat of New Entrants
A perfect example is web design, as there are free in every location. This is a simple market to enter with few requirements, other than skills, plan and relevant software and hardware. This does mean there are many fresh entrants!
2. Buyer Power
A suitable example is the grocery sector since supermarkets have a propensity to retain power over suppliers due to volume and price of contracts. They dictate terms, set prices and can probably end agreements at any time.
3. Threat of Substitution
The substitute to all services is DIY. For instance hairdressing or writing a will. Focus is on proficiency, customer service or added value.
4. Supplier power
We know some sectors have monopolistic (one) or oligopolistic (few) suppliers, for example utility companies. Sometimes customers have little option i.e. where to buy domestic water suppliers though this is changing.
In jewellery sector, diamond suppliers often seize the power and can put prices, keep back supply and restrict sales.
5. Competitive rivalry
These include Estate agents, web design and office stationary. Many competitors often buy on price.

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