Porter’s Five Forces Model

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Description: Porter’s five forces model is a tool that is deployed by businesses and organizations throughout the world. It basically helps to explain where the power lies of a company in a business situation. It helps to depict a clear picture of the characteristics of the position where a company is and compares with the characteristics of the position where it wants to move. With a clear picture, a company can enhance its strength, improve the weak areas and avoid the negativities in the environment.

Traditionally this tool is used to evaluate if the new products or services or even the business itself has the capability to be lucrative. It also can be self explanatory when it is considered in evaluating balance of power in other situations.

Bargaining power of Suppliers: This segment assesses the convenience of suppliers in driving price levels. It is mainly dependent on the number of suppliers available for a product or service. The larger the number of suppliers, the lesser would be their bargaining power.

However, if the suppliers are concentrated, their bargaining power will naturally increase forcing a business to agree on their terms.

Bargaining power of Buyers: This segment evaluates the convenience of buyers in driving price levels for a company’s product/service. Again it is driven by the number of buyers, the importance of the clients to a business, and the switching cost of products to the customers. If the buyers are concentrated, they have high bargaining power and vice versa.

Industry Rivalry: Here it is assessed that what are the capabilities of the competitive businesses in the industry and their numbers. If the competitors are in great number, providing products/services equal to your business, then your business have a low power in this situation.

The reason is that the suppliers and buyers will switch to other businesses if they don’t get a good deal from your business.

Threat of Substitution: Threat of substitution is evaluated by the product/services that are present in the market and are closely associated with your product. In easy terms it means, that if there are greater similar products/services present in market like your product, then it will be easy for the customers to switch the products/services if they do not get a good deal out of your product.

Threat of New Entrants: The power of a business is also assessed by the ability of the other businesses to enter into the industry. The new entries can come easily in the industry, decreasing the power if- the cost to enter and compete effectively in market is low, there are few economies of scales and the technology is easily available and is cheap.

Reference: http://www.researchomatic.com/Porter-Five-Forces-Model-64477.html

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