PORTER’S FIVE FORCES MODEL -

 

MICHEL PORTER’S FIVE FORCES MODEL

It is a tool used to carry out category attractiveness analysis.
Porter’s 5 forces is a model that helps in identifying industry’s strengths and weaknesses, helps in understanding competition and developing strategies to enhance company’s long term profitability.

THREAT 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, the more an established company's position could be significantly weakened and vice-versa. An industry with strong barriers to entry is ideal for existing companies within, since the companies would be able to charge higher prices and negotiate better terms.

Some barriers to entry include:

●       Investment cost

●       Economies of scale

●       Regulatory and Legal restrictions

●       Product differentiation

●       Access to suppliers and distribution channels

DEGREE OF COMPETITIVE RIVALRY

This helps in finding out the number of competitors and their influence in the market. When competitive rivalry is high you can lose your profits, suppliers and customers but when competitive rivalry is low you can even enjoy high profit margins.
Intense competition will engage you in:

●       Price wars

●       Intensive promotion

●       Investment in new products
All these activities will increase your price and will lower your profits.

 BARGAINING POWER OF SUPPLIER

This is determined by how many potential suppliers you have and  how expensive it would be to switch from one supplier to another . If you have fewer suppliers it will not be easy for you to switch as you don’t have the choice and it can impact your profits as they are in a position to charge more and vice-versa.
If a firm’s suppliers have bargaining power they will:

●       Exercise that power

●       Will sell at a higher price

●       Squeeze industry profits
 

BARGAINING POWER OF CUSTOMERS

It is the ability of the customers to drive your prices down to increase the required quality for the same price, therefore reducing the profits.. It is affected by how many customers a company has, 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. Customers will have a strong bargaining power when they will have a wide range of supply firms, easy switching options and much more.

THREAT OF SUBSTITUTION

Substitutes are the products that can be regarded as something that meets the same need. 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. 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 which in turn can lower your profits.

CONCLUSION:
Understanding Porter's Five Forces and how they apply to an industry, can enable a company to adjust its business strategy to better use its resources to generate higher earnings for its investors.