Porter’s 5 forces

Five Forces model of Michael Porter is a tool used for evaluating company's competitive position. Michael Porter provided a framework that models an industry and therefore implicitly also businesses as being influenced by Major Five Forces.

What is good about Porter's Five Forces model?

Porter has the ability to represent complex concepts in relatively easily accessible formats. His book about the Five Forces model is written in a very easy and understandable language. Even though his model is backed up by some complex model, the model itself is simple and easily comprehensible at all levels.

Porter's Five Forces model provides suggested points under each main heading, by which you can develop a broad and sophisticated analysis of competitive position. This can be then used when Evaluating different target segments or creating strategy, plans, or making investment decisions about your business or organization.

What is the basic idea behind Porter's Five Forces model?

Porter's Five Forces model is made up by identification of 5 fundamental competitive forces:

· Barriers to entry

· Threat of substitutes

· Bargaining power of buyers

· Bargaining power of suppliers

· Rivalry among the existing players

 

Sometimes we need to consider different factors under each title then When putting all these points together we get Porter's Five Forces model which looks like this:

Force 1: Barriers to entry

Barriers to entry measure how easy or difficult it is for new entrants to enter into the industry. This can involve for example:

· Cost advantages (economies of scale, economies of scope)

· Access to production inputs and financing,

· Government policies and taxation

· Production cycle and learning curve

· Capital requirements

· Access to distribution channels

Patents, branding, and image also fall into this category.

Force 2: Threat of substitutes

Every top decision makes has to ask: How easy can our product or service be substituted? The following needs to be analyzed:

· How much does it cost the customer to switch to competing products or services?

· How likely are customers to switch?

· What is the price-performance trade-off of substitutes?

If a product can be easily substituted, then it is a threat to the company because it can compete with price only.

Force 3: Bargaining power of buyers

Now the question is how strong the position of buyers is. For example, can your customers work together to order large volumes to squeeze your profit margins? The following is a list of other examples:

· Buyer volume and concentration

· What information buyers have

· Can buyers corner you in negotiations about price

· How loyal are customers to your brand

· Price sensitivity

· Threat of backward integration

· How well differentiated your product is

· Availability of substitutes

Having a customer that has the leverage to dictate your prices is not a good position.

Force 4: Bargaining power of suppliers

This relates to what your suppliers can do in relationship with you.

· How strong is the position of sellers?

· Are there many or only few potential suppliers?

· Is there a monopoly?

· Do you take inputs from a single supplier or from a group? (concentration)

· How much do you take from each of your suppliers?

· Can you easily switch from one supplier to another one? (switching costs)

· If you switch to another supplier, will it affect the cost and differentiation of your product?

· Are there other suppliers with the same inputs available? (substitute inputs)

The threat of forward integration is also an important factor here.

Force 5: Rivalry among the existing players

Finally, we have to analyze the level of competition between existing players in the industry.

· Is one player very dominant or all equal in strength/size?

· Are there exit barriers?

· How fast does the industry grow?

· Does the industry operate at surplus or shortage?

· How is the industry concentrated?

· How do customers identify themselves with your brand?

· Is the product differentiated?

· How well are rivals diversified?

Rivalry is the fifth factor in the Five Forces model but probably the one with the most attention.

Conclusion:

After Segmentation we must start to evaluate each segment in order to know will it be profitable if targeted or not.

Thus, to evaluate the different segments, we need to apply Porter’s five forces on each segment in addition to the following factors in order to decide which segment to target:

• Company objectives and resources
• Segment size and growth
• Indicator for profitability
• Large size segment with high growth rate is not suitable for small companies
• Sales estimate
• Cost estimate

Who is Michael Porter?

Michael Porter is a professor at Harvard Business School and is a leading authority on competitive strategy and international competitiveness. Michael Porter was born in Ann Arbor, Michigan.

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Source:

1) Maxi Pedia

2) Competitive Strategy: Techniques for Analyzing Industries and Competitors