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INTRODUCTION

Porter's five forces analysis is a framework for industry analysis and business strategy development by Michael E. Porter. The Five Forces model of Porter is an outside-in business unit strategy tool that is used to make an analysis of the attractiveness of an industry structure. It captures the key elements of industry competition.

PORTERs FIVE FORCEs MODEL


Potential entrants
Threat of new entrants
Bargaining power Industry competitors of suppliers

Suppliers
Rivalry among existing firms

Buyers
Bargaining power of buyers

Threat of substitutes

Substitute products

Threat of New Entrants


Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will tend towards zero.

Bargaining Power of Suppliers


The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services to the firm can be a source of power over the firm. When there are few substitutes suppliers may refuse to work with the firm, or charge excessively high prices for unique resources.

Bargaining Power of Buyers


The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes.

Threat of Substitute Products


The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives.

For example, water might be considered a substitute for Coke, whereas Pepsi is a competitor's similar product.

Rivalry Among Existing Competitors


For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry. Intense rivalry often plays out in the following ways like Making new product introductions, Increasing consumer warranties or service, Staging advertising battles, Using price competition.

Competitive Advantage
The Competitive Advantage model of Porter learns that competitive strategy is about taking offensive or defensive action to create a defendable position in an industry, in order to cope successfully with competitive forces.

Companies can combat the pressure of the five forces and create competitive advantages.
There are 2 basics types of Competitive Advantage : Cost leadership (low cost) Differentiation

Strengths of five forces model


The model is strong tool for competitive analysis at industry level. It provides useful input for performing a SWOT analysis.

Limitations
Inside-out strategy is ignored (core competence) It does not cope with synergies and interdependencies within the portfolio of large corporations (parenting advantage)

The environments which are characterized by rapid, systemic and radical change require more flexible, dynamic or emergent approaches to strategy formulation (disruptive innovation)
Sometimes it may be possible to create completely new markets instead of selecting from existing ones (blue ocean strategy)