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:
- Threat of Entry
- Bargaining power of suppliers
- Bargaining power of buyers
- Threat of Substitutes
- Rivalry among competitors
1. The threat of entry:
Depends on barriers of entry and expected retaliation.
Factors influencing barriers of entry are:
- Supply-side economies of scale
- The demand-side benefit of scale
- Customer switching costs
- Capital requirements
- Incumbency advantage independent of size
- Unequal access to distribution channel
- Restrictive government policy.
Newcomers will fear expected retaliation if:
- Incumbents have previously responded vigorously to new entrants
- Incumbents have substantial resources to fight back.
- incumbents cut the price to keep the market share.
- The industry growth rate is slow, so high competition with incumbents to gain market share.
2. Bargaining power of suppliers:
High power if:
- Concentrated industry
- Suppliers serving many other industries and not solely depend on this industry.
- High switching costs industry participants.
- Suppliers offer differentiated products.
- No substitute product
- Threat from suppliers to integrate forward into the industry.
3. Bargaining power of buyers:
High power if:
- Fewer buyers
- Standardized or undifferentiated products
- Low switching costs
- The threat to integrate backward
4. The threat of substitutes:
- Attractive price-performance trade-off
- Low switching costs to buyers
5. Rivalry among competitors:
- Lots of small size competitors
- The slow industry growth rate
- High exit barriers
- Aspiration for leadership positions
- Lack of communication among firms.