Porter's five forces framework.
Porter's five forces framework is a helpful tool for companies which are about to start a business or entering a new industry. This article might be helpful for business oriented people (owners, c-levels, managers, consultants).
It helps in analyzing the level of competition within a certain industry.
Competition in an industry depends on five forces:
1.The threat of new entrants
2. Bargaining power of suppliers.
3. Bargaining power of buyers.
4. The threat of substitute products or services
5. The threat of existing competitors.
The collective strength of these forces determines the profit potential of and industry and thus its attractiveness.
If all of the five forces are intense (e.g. pizza restaurants) almost no company earns attractive returns of investments. If the forces are averaged (e.g. drugstore), there is room for higher returns.
Threat of new entrants
Seriousness of the threat of new entrants on competitive landscape depends on barriers to entry. It might be: government policies, large capital requirements, large investments in R&D etc. They might work on gaining market share and bring new capacity in.
Bargaining power of suppliers
The concentration of suppliers and the availability of substitute suppliers are important in determining supplier power. If there are fewer suppliers within industry - the more power they have. The more suppliers within industry - the less power they have and lower margins are there. When we speak about supplier power we shall mention:
supplier level of differentiation in the product/service
distribution channels
presence of substitutes
the switching costs of companies in the industry
Bargaining power of buyers
More customers and more alternatives to buy from - more power they have. Switching cost is low. How seller can react? Differenation of products and services, building loyalty by successful track record, long term relationship.
Threat of substitute products or services and existing industry rivalry.
Looking for the substitute products which w
Competitors might brand themselves differently and can be harder to spot but have in mind that they are rivalry as they solve the same pain or fulfil a similar need.
Rivalry among existing competitors.
Number and capability of existing competitors shows how is competition in marketplace doing.
When rivalry is high, competitors are likely to conduct price wars. These might drive to lower profit margin and when barriers to exit (high fixed costs) are high companies are forced to stay in the industry.
