The model originated from Michael E. Porter's 1980 book "Competitive Strategy: Techniques for Analysing Industries and Competitors."
Porter identified five competitive forces that shape every single industry and market. These forces help us to analyse everything from the intensity of competition to the profitability and attractiveness of an industry.
Porter five forces analysis is a framework to analyse level of competition within an industry and business strategy development. It draws upon industrial organisation (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market
Supplier Power: Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are.
Here are a few reasons that suppliers might have power: Existing loyalty to major brands Incentives for using a particular buyer (such as frequent shopper programs) High fixed costs Scarcity of resources High costs of switching companies Government restrictions or legislation
Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, then they are often able to dictate terms to you.
Here are a few reasons that customers might have power: There are very few suppliers of a particular product There are no substitutes Switching to another (competitive) product is very costly The product is extremely important to buyers - can \ can't do without it The supplying industry has a higher profitability than the buying industry
Competitive Rivalry: What is important here is the number and capability of your competitors. If you have many competitors, and they offer equally attractive products and services, then you'll most likely have little power in the situation, because suppliers and buyers will go elsewhere if they don't get a good deal from you. On the other hand, if no-one else can do what you do, then you can often have tremendous strength.
A highly competitive market might result from: The main issue is the similarity of substitutes. For example, if the price of coffee rises substantially, a coffee drinker may switch over to a beverage like tea. If substitutes are similar, it can be viewed in the same light as a new entrant.
Threat of Substitution: This is affected by the ability of your customers to find a different way of doing what you do for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power.
Here are a few factors that can affect the threat of substitutes: Small number of buyers Purchases large volumes Switching to another (competitive) product is simple The product is not extremely important to buyers; they can do without the product for a period of time Customers are price sensitive
Threat of New Entry: Power is also affected by the ability of people to enter your market. (Barriers to entry) If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favourable position and take fair advantage of it.
Definition of Barriers to entry The existence of high start-up costs or other obstacles that prevent new competitors from easily entering an industry or area of business. Barriers to entry benefit existing companies already operating in an industry because they protect an established company's revenues and profits from being whittled away by new competitors.
Definition of Barriers to entry (2) Barriers to entry can exist as a result of government intervention (industry regulation, legislative limitations on new firms, special tax benefits to existing firms, etc.), or they can occur naturally within the business world. Some naturally occurring barriers to entry could be technological patents or patents on business processes, a strong brand identity, strong customer loyalty or high customer switching costs.
Using the Tool To use the tool to understand your situation, look at each of these forces one-by-one and write your observations on a worksheet. Brainstorm the relevant factors for your market or situation, and then check against the factors listed for the force in the diagram above. Then, mark the key factors on the diagram, and summarise the size and scale of the force on the diagram. An easy way of doing this is to use, for example, a single "+" sign for a force moderately in your favour, or "-" for a force strongly against you.
Using the Tool Then look at the situation you find using this analysis and think through how it affects you. Bear in mind that few situations are perfect; however looking at things in this way helps you think through what you could change to increase your power with respect to each force. What s more, if you find yourself in a structurally weak position, this tool helps you think about what you can do to move into a stronger one.
An example (1)
An example (2)
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