Porter's Five Forces
Model
Presented by Group 8
Background
Porter's five forces analysis is a framework that attempts to
analyze the level of the competition within an industry and
business strategy development.
The principal innovator of this analysis is Michael E. Porter of
Harvard University.
Components of Porter's Five Forces Model
Bargaining power of
buyers
Threat of new entrants
Bargaining power of
suppliers
Threat of substitutes
Rivalry inside the
industry
Threat of new entrants
The threat of new entrants is high when it is relatively easy for new competitors to enter
the industry and gain a foothold, which can increase competition, drive down prices, and
reduce profit margins for existing firms. On the other hand, the threat of new entrants is
low when there are significant barriers to entry that make it difficult for new competitors
to enter the market and compete with existing firms.
Examples of barriers to entry that can reduce the threat of new entrants include
economies of scale, proprietary technology, brand recognition, high capital requirements,
regulatory barriers, and access to distribution channels. These barriers can make it
difficult for new firms to establish themselves in the market and compete with established
players.
Threat of substitutes
The substitutes can be defined as the products of other industries that have ability to
satisfy similar needs.
Example: Coffee can be a substitute for tea, as it can be also used as a caffeine drink in
the morning.
When the number of substitute product changes, the demand of a related product also
gets affected.
When the number of substitute product increases, the competition also increases as the
customers have more alternatives to select from. This forces the companies to raise or
lower down the prices. Hence, it can be concluded that the competition created by the
substitute firms is "price competition".
Bargaining power of buyers
The bargaining power of buyers is high when buyers have significant leverage in the
market and can influence the price, quality, and terms of sale for products or services. On
the other hand, the bargaining power of buyers is low when buyers have limited leverage
and must accept the terms set by the firms in the industry.
Factors that can affect the bargaining power of buyers include the number of buyers in
the market, the size and concentration of buyers, the availability of substitute products
or services, the level of product differentiation, and the importance of the product or
service to the buyer.
For example, if there are only a few large buyers in the market, they may have more
bargaining power because they represent a significant portion of the market demand.
Additionally, if there are many substitutes available for a product or service, buyers may
have more bargaining power because they can easily switch to another supplier if they
are unhappy with the terms offered by their current supplier.
Bargaining power of Suppliers
The bargaining power of suppliers is high when suppliers have significant leverage in the
market and can influence the price, quality, and availability of inputs or resources
required by firms in an industry. On the other hand, the bargaining power of suppliers is
low when suppliers have limited leverage and must accept the terms set by the firms in
the industry.
Factors that can affect the bargaining power of suppliers include the number of suppliers
in the market, the size and concentration of suppliers, the uniqueness of the inputs or
resources supplied, the availability of substitute inputs or resources, and the importance
of the input or resource to the firm.
For example, if there are only a few large suppliers in the market, they may have more
bargaining power because they represent a significant portion of the market supply.
Additionally, if the input or resource supplied is unique and not easily substituted, the
supplier may have more bargaining power because the firm is more dependent on them.
Rivalry inside the industry
For most industries the intensity of competitive rivalry is the major determinant of the
competitiveness of the industry.
Potential factors:
Sustainable competitive advantage through innovation
Competition between online and offline companies
Level of advertising expense
Powerful competitive strategy
Firm concentration ratio
Degree of transparency
Question
Time
Group 8
Anna Beatrice Mangalindan
Diana Rose Ann Mancilla
Andirine Quiambao