Porter's Five Forces
Introduction
Porter's Five Forces is a framework developed by Michael Porter at Harvard Business School in 1979. It is used to analyze the competitive environment within an industry and to develop business strategies. The five forces are: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products or services, and intensity of competitive rivalry.
Threat of New Entrants
The threat of new entrants refers to the potential for new competitors to enter the market. This is influenced by barriers to entry, which can include economies of scale, product differentiation, capital requirements, access to distribution channels, and government policy. The higher these barriers, the lower the threat of new entrants.
Bargaining Power of Suppliers
The bargaining power of suppliers is the ability of suppliers to increase prices, reduce the quality of goods or services, or reduce the quantity of goods or services. Factors that increase supplier power include the number of suppliers, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and the amount of information they have.
Bargaining Power of Buyers
The bargaining power of buyers is the ability of customers to drive down prices, demand better quality or more services, and generally play competitors off against each other. Factors that increase buyer power include the number of buyers, their importance to the supplier, the cost to them of switching from one to another, and their knowledge of the supply market.
Threat of Substitute Products or Services
The threat of substitute products or services is the potential for customers to find a different way of doing what your product or service does. For example, video conferencing is a substitute for travel. Factors that increase the threat of substitutes are the relative price and performance of the substitute and the willingness of customers to switch.
Intensity of Competitive Rivalry
The intensity of competitive rivalry is the major determinant of the competitiveness of the industry. Factors that increase competitive rivalry include the number of competitors, the inherent stability of the market, the rate of industry growth, the diversity of competitors, and the degree of perceptual differentiation among competitors.
Conclusion
Porter's Five Forces is a powerful tool for understanding the competitive forces at work in an industry, and for identifying a strategic niche that a firm can exploit within its industry. It is a cornerstone of business strategy and planning.