Porter’s Five Forces

By | November 19, 2019

Porter’s Five Forces is a useful understanding of the competitiveness of your business environment, and for identifying your strategy’s potential profitability.

Porter’s Five forces are:

  1. Threat of Entry
  2. Bargaining power of suppliers
  3. Bargaining power of buyers
  4. Threat of Substitutes
  5. Rivalry among competitors

Porter's five forces

1. The threat of entry:

Depends on barriers of entry and expected retaliation.

Factors influencing barriers of entry are:

  1. Supply-side economies of scale
  2. The demand-side benefit of scale
  3. Customer switching costs
  4. Capital requirements
  5. Incumbency advantage independent of size
  6. Unequal access to distribution channel
  7. Restrictive government policy.

Newcomers will fear expected retaliation if:

  1. Incumbents have previously responded vigorously to new entrants
  2. Incumbents have substantial resources to fight back.
  3. incumbents cut the price to keep the market share.
  4. The industry growth rate is slow, so high competition with incumbents to gain market share.

2. Bargaining power of suppliers:

High power if:

  1. Concentrated industry
  2. Suppliers serving many other industries and not solely depend on this industry.
  3. High switching costs industry participants.
  4. Suppliers offer differentiated products.
  5. No substitute product
  6. Threat from suppliers to integrate forward into the industry.

3.  Bargaining power of buyers:

High power if:

  1. Fewer buyers
  2. Standardized or undifferentiated products
  3. Low switching costs
  4. The threat to integrate backward

4. The threat of substitutes:

High if:

  1. Attractive price-performance trade-off
  2. Low switching costs to buyers

5. Rivalry among competitors:

High if:

  1. Lots of small size competitors
  2. The slow industry growth rate
  3. High exit barriers
  4. Aspiration for leadership positions
  5. Lack of communication among firms.