Porter Flashcards
Porter 5 Forces
Porter’s Five Forces is a model that identifies and analyzes five competitive forces that shape every industry and helps determine an industry’s weaknesses and strengths.
Why Five Forces analysis is frequently used?
to identify an industry’s structure to determine corporate strategy.
Porter’s model can be applied to
any segment of the economy to understand the level of competition within the industry and enhance a company’s long-term profitability.
Porter’s Five Forces is a business analysis model that helps to explain:
why various industries are able to sustain different levels of profitability. The model was published in Michael E. Porter’s book, “Competitive Strategy: Techniques for Analyzing Industries and Competitors” in 1980
Five Forces model is widely used to
analyze the industry structure of a company as well as its corporate strategy.
The five forces are frequently used to measure
competition intensity, attractiveness, and profitability of an industry or market.
Porter’s five forces are:
- Competition in the industry
- Potential of new entrants into the industry
- Power of suppliers
- Power of customers
- Threat of substitute products
Competition in the Industry
The first of the five forces refers to the number of competitors and their ability to undercut a company. The larger the number of competitors, along with the number of equivalent products and services they offer, the lesser the power of a company.
Potential of New Entrants Into an Industry
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
Power of Suppliers
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 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.
Drive the cost up and push other advantages
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.
Threat of Substitutes
The last of the five forces focus 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.
