Porter’s Five Forces analysis

 Porter’s Five Forces analysis is a

framework that helps analyzing the level of
competition within a certain industry.
 It is especially useful when starting a new
business or when entering a new industry
sector.
The Porter Five Forces model brings together a large number of
different factors in a simple model to analyze the basic
competitive landscape of an industry.

The
Potter Five Forces model identified five main sources of
competition, namely:

Bargaining power of suppliers

Bargaining power of Buyers
Threats of New Entrants
Threats of Substitutes
Competition of existing competitors in the industry
 The Threat of New Entrants
 This force considers how easy or difficult it is
for competitors to join the market place.
 The easier it is for a new competitor to gain
entry, the greater the risk is of an established
business's market share being depleted.
The threat of entry is greatest when:
■ economies of scale are low in the industry
■ the technology needed to enter the industry is
relatively cheap
■ distribution channels are easy to access
■ there are no legal or patent restrictions on
entry
■ the importance of product differentiation is
low.
The bargaining power of suppliers

 
 This force analyzes how much power a
business's supplier has and how much control
it has over the potential to raise its prices,
which, in turn, lowers a business's profitability.
 It also assesses the number of suppliers of raw
materials and other resources that are
available.
Suppliers will be relatively powerful compared with buyers when:

■ the cost of switching is high.

■ when the brand being sold is very powerful
and well known,
■ suppliers could realistically threaten to open
their own forward-integration operations.
■ customers have little bargaining power as they
are small firms and fragmented.
The bargaining power of customers

 This force examines the power of the

consumer, and their effect on pricing and
quality.
 Consumers have power when they are fewer in
number but there are plentiful sellers and it's
easy for consumers to switch.
Buyer power will also be increased when:

■ There are many undifferentiated small

supplying firms.

■ The cost of switching suppliers is low

■ Buyers can realistically and easily buy from

other suppliers.
The threat of substitute products

 This force studies how easy it is for consumers

to switch from a business's product or service
to that of a competitor.
 Threats of substitution will exist when:

■ New technology makes other options

■ Price competition forces customers to consider

alternatives

■ Any significant new product leads to

consumer spending that results in less being
spent on other goods
Competitive rivalry

 This force examines how intense the

competition is in the marketplace. It considers
the number of existing competitors and what
each one can do.
Competitive rivalry is most likely
to be high where:

■ It is cheap and easy for new firms to enter an

industry

■ There is a threat from substitute products

■ Suppliers have much power

■ Buyers have much power.