Porter's Five Force Model

Introduction

Porter's fives forces model is an excellent model to analyse a particular industry. It looks at the five main factors that affect a particular industry.


The Diagram below shows the five forces involved in Porter's Five Forces Model.

Porter's Five Forces Diagram

What Forces Are Involved in Porter's Five Forces Model?

Porter's Five Forces Model contains the following factors:

It is imperative to investigate each of these factors during research prior to entering a new industry or even when you would like to improve business performance.

Competitive Rivalry

Competitive rivalry is a good starting point to when analysing a particular industry. If entry to an industry is easy then competitive rivalry is likely to be high. If it is easy for customers to move to substitute products for example from coke to water then again rivalry will be high. Generally competitive rivalry will be high when:

Power Of Suppliers

Suppliers are also essential for the success of an organisation as they provide businesses with the resources they need to conduct their business. Supplier power will be strong when:

Power Of Buyers

Buyers or customers can exert influence and control over an industry in certain circumstances. This happens when:

Threat Of Substitutes

Are there alternative products that customers can purchase instead of yours? alternative products that offer the same benefit as your products? The threat from substitute (competitor) products is high when:

Threat of New Entrant

The threat of new organisations entering the industry is high when it is easy for an organisation to enter the industry i.e. entry barriers are low. When a new business is deciding whether to enter an industry it will look at:

Summary

Porter's five forces model is an essential analysis tool if you want to understand an industry. All five of Porter's forces affect the strength of an industry and the prices that an industry can charge.

 

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