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Porters Five Forces Model

Porters Five Forces Model

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Published by: sonuka on Feb 27, 2009
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06/06/2013

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Porters Five Forces Model
Michael Porter (Harvard, Competitive Strategy 1980) developed the so called 5 FiveForces Analysis model to better identify factors that shape the character of competition, to assess the structural attractiveness and business value of anyindustry and to pinpoint strengths and weaknesses in a company.In addition to and in combination with the SWOT analysis
, the Five Forces model byMichael Porter provides another 
analysis tool to identify opportunities and risks whenentering untapped territory in any industry or market.
Porter’s Five Forces model, other than a SWOT analysis,
provides clear action and thusdoes not rely solely on subjective judgment.
If the actions that derived from the FiveForces model are synchronized with business requirements and goals it can become asubstantial business driver in the competitive environment.
Porters Five Forces Model is used for analysis of an industry or pure competitionwithin a market
. It is likely the
best model
to be used in
decisions of entry or changewithin a market
, and should always be considered during
the business planning stagein a company life cycle.
The Porters Five Forces model proposes
that an industry is influenced by five forces
.
An executive can use the model to understand the industry competitive landscape, todetermine how and where the firm should operate. The model is also used to analyzethe attractiveness of an industry structure.
 
Porters Five Forces Model is also known as Porter's Competitive Forces model
, probably one of the most often used business strategy tools
. It has proven its usefulnesson numerous occasions
. Porter's model is particularly strong
in thinking in acompetitive mindset - from external forces to inside the company
.
 
Methods
The strength of each of the five forces affecting competition in the chosen industry isto be assessed. The company’s position compared to the underlying causes of eachforce is also assessed
.A plan of action is devised that may include:1)
Positioning the organization
to provide the best defense against competitive forces.2)
Influencing the balance of the forces
through strategic moves and other pro-activemeasures.3
) Anticipating shifts in the forces and positioning
the organization and its goals andactions accordingly.
Michael Porter's Five Forces Model
Porter
explains that there are five forces
that determine industry attractiveness andlong-run industry profitability
. These five
"competitive forces"
are:
 
-
The threat of entry of new competitors (new entrants)
-
The threat of substitutes
-
The bargaining power of buyers
-
The bargaining power of suppliers
-
The degree of rivalry between existing competitors
Threat of New Entrants
New entrants to an industry can raise the level of competition
, thereby
reducing itsattractiveness
. The threat of new entrants largely depends on the barriers to entry.
Highentry barriers exist in some industries
(e.g. shipbuilding) whereas
other industries arevery easy to enter
(e.g. estate agency, restaurants). Key barriers to entry include:-
Economies of scale
-
Capital / investment requirements
-
Customer switching costs
-
Access to industry distribution channels
-
The likelihood of retaliation from existing industry players.
Threat of Substitutes
The presence of substitute products can lower industry attractiveness andprofitability as they limit price levels
. The threat of substitute products depends on:-
Buyers' willingness to substitute
-
The relative price and performance of substitutes
-
The costs of switching to substitutes
Bargaining Power of Suppliers
Suppliers are the businesses that supply materials & other products into theindustry
.

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