Porter’s five forces model turned the perception of the profitability upside down. Michael E. Porter, a world-renowned economist, a professor at Harvard Business School and author of the leading literature in the field of strategic management, perceives the attractiveness of the industry in relation to the five forces presented below.
Porter’s five forces model provides a better understanding of the industry dynamics.
Industry analysis is one of the crucial elements of the analysis prepared prior to the business model development and other strategic decisions made. Unlike some other more quantitative methods, Porter’s five forces model relies primarily on qualitative assessment.
Porter’s 5 forces model and the industry attractiveness – force: the bargaining power of buyers
Bargaining power of buyers is present when buyers are abusing their power to decrease the purchasing prices, increase the quality, add additional services, etc.
Factors affecting the bargaining power of buyers are:
- Concentration of buyers
- Fragmentation of suppliers
- Alternative sources of supply
- Low switching cost
- The importance of product / service to the customer
- The threat of takeover by the buyer
Michael Porter five forces model and the industry attractiveness – force the bargaining power of suppliers
Bargaining power of suppliers is present when suppliers are abusing their power to raise the selling prices, decrease the quality and dispose the additional services, etc..
Factors affecting the bargaining power of suppliers are:
- Concentration of suppliers
- Fragmentation of customers
- Alternative sources of supply
- High switching cost
- Strong brand of the supplier
- The importance of the transaction to the supplier
- The threat of takeover by the supplier
5 forces model and the industry attractiveness – force the threat of new entrants
The entry of new competitors typically leads to lower profitability of all competitors in the industry.
Factors affecting the threat of new entrants are:
- Initial investment in fixed assets
- Economies of scale
- Experiences
- Access to supply and distribution channels
- Expected retaliation
- Loyalty of customers and suppliers
- Legislation and politics
- Differentiation
Five forces model analysis and the industry attractiveness – force the threat of substitutes
Profitability of the companies operating in the industry is not affected solely by the competition and new entrants, but also by substitutes.
Threat of substitutes involves three dimensions:
- Product for product / service for service substitution
- Substitution of need
- Generic substitution
Porter’s five forces model and the industry attractiveness – force the competitive rivalry
Factors affecting the competitive rivalry are:
- Competitors are in balance
- Low differentiation
- Slow market growth
- High fixed costs in the industry
- High exit barriers
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