The 5 forces of Porter are named after Michael E. Porter. This model classifies and examines the competitive forces that characterize every single industry plus it helps to give a clear understanding of what the strengths and weaknesses are of each type of industry. In addition to this, the 5 forces of Porter were mainly designed as a response to the famous “SWOT Analysis”. These 5 forces are the following: 1. Competition in the industry 2.
Potential of new entrants into industry 3. Power of suppliers 4. Power of customers . Threat of substitute products 1. The more competitors offering similar products or services, the less power a firm has. This has to do with the fact that suppliers and buyers will go elsewhere if you don’t propose a good deal. However, if a firm is good in what it does and no other competitor can come very close to what you offer this eventually means you can have an advantage compared to other competitors.
2. A market that generates high returns is a market that will attract many firms to enter that market.When a lot of firms enter a specific market, this will eventually lead to more competition, which subsequently leads to a decrease in profitability. Incumbents blocking the entry of new potential entrants can solve this problem. 3. This involves the process of determining how easy it is for suppliers to higher up their prices. The more suppliers involved in a specific market, the more freedom you have in choosing. The less suppliers in a specific market, the more help you need from them meaning that they become more powerful.
4.Determining whether buyers have a lot of power or not. This depends on the number of buyers.
If you for example have many suppliers and only 1 buyer then you can say that the buyer has a lot of power because he can easily set his own price and eventually the supplier needs to accept it or else he will lose a client. However, if you have many buyers, this means that buyers have less power to set up their desired price. In this case, suppliers have the advantage. 5. This is affected by the ability of customers finding a different way of doing what you do.If there are a lot of substitutes available, demand becomes elastic since customers have a lot of alternatives.
The 5 forces of Porter are used in a situation when an evaluation of a firm’s position needs to be done plus it helps assessing the potential for profitability in an industry. From a general point of view, one can determine the balance of power of a firm in a specific market. The 5 forces mentioned above lets you think how each of these forces are affecting you, what your strengths and weaknesses are.
After having determined this, you can then concentrate in moving the balance of power to your side.