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Understanding Porter's Five Forces Model

Porter's Five Forces model analyzes five competitive forces that shape every industry: 1) Competition in the industry is affected by the number of competitors and equivalent products. More competition means less power for individual companies. 2) Supplier bargaining power depends on how many suppliers there are and if inputs can be easily switched. Fewer suppliers gives them more power. 3) Customer bargaining power is affected by how many customers there are and if they are significant. Small, powerful customers have more negotiating power. 4) Potential new entrants can weaken established companies if barriers to entry are low. High barriers to entry protect existing companies. 5) Substitute products or services pose a threat if close substitutes are available, giving customers options and

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120 views6 pages

Understanding Porter's Five Forces Model

Porter's Five Forces model analyzes five competitive forces that shape every industry: 1) Competition in the industry is affected by the number of competitors and equivalent products. More competition means less power for individual companies. 2) Supplier bargaining power depends on how many suppliers there are and if inputs can be easily switched. Fewer suppliers gives them more power. 3) Customer bargaining power is affected by how many customers there are and if they are significant. Small, powerful customers have more negotiating power. 4) Potential new entrants can weaken established companies if barriers to entry are low. High barriers to entry protect existing companies. 5) Substitute products or services pose a threat if close substitutes are available, giving customers options and

Uploaded by

Ayushi Anand
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

PORTER’S FIVE FORCES MODEL

COMPETITION IN THE INDUSTRY

The first of the five forces refers to the number of competitors. The larger the number of
competitors, along with the number of equivalent products and services they offer, the lesser
the power of a company. Suppliers and buyers seek out a company's competition if they are
able to offer a better deal or lower prices. Conversely, when competitive rivalry is low, a
company has greater power to charge higher prices and set the terms of deals to achieve higher
sales and profits.
BARGAINING POWER OF SUPPLIERS

The next factor in the five forces model addresses how easily suppliers can drive up the cost of
inputs. It is affected by the number of suppliers of key inputs of a good or service, how unique
these inputs are, and how much it would cost a company to switch to another supplier. The
fewer suppliers to an industry, the more a company would depend on a supplier. As a result, the
supplier has more power and can drive up input costs and push for other advantages in trade.
On the other hand, when there are many suppliers or low switching costs between rival
suppliers, a company can keep its input costs lower and enhance its profits.
BARGAINING POWER OF CUSTOMERS

The ability that customers have to drive prices lower or their level of power is one of the five
forces. It is affected by how many buyers or customers a company has, how significant each
customer is, and how much it would cost a company to find new customers or markets for its
output. A smaller and more powerful client base means that each customer has more power to
negotiate for lower prices and better deals. A company that has many, smaller, independent
customers will have an easier time charging higher prices to increase profitability.
THREATS OF NEW ENTRANTS

A company's power is also affected by the force of new entrants into its market. The less time
and money it costs for a competitor to enter a company's market and be an effective competitor,
the more an established company's position could be significantly weakened. An industry with
strong barriers to entry is ideal for existing companies within that industry since the company
would be able to charge higher prices and negotiate better terms.
THREATS OF SUBSTITUTE PRODUCTS OR
SERVICES
The last of the five forces focuses on substitutes. Substitute goods or services that can be used in
place of a company's products or services pose a threat. Companies that produce goods or
services for which there are no close substitutes will have more power to increase prices and
lock in favorable terms. When close substitutes are available, customers will have the option to
forgo buying a company's product, and a company's power can be weakened.

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