How to use Porter’s Five Forces model to assess the overall competitive landscape for your particular market.
Porter’s Five Forces model is a widely used framework for analysing the competitive environment of a particular industry or business sector. Porter’s Five Forces are five separate factors that can impact business growth. The theory was developed by Michael E. Porter, a Harvard Business School academic.
The Five Forces are as follows:
- The intensity of the competitive landscape.
- Level of supplier power.
- Buyer’s entry / exit costs.
- The threat of substitute products.
- Access to the market for new entrants.
The intensity of competitive rivalry refers to the degree to which firms within an industry compete for market share and profitability. Factors that increase this intensity include a large number of competitors, high fixed costs, and slow industry growth.
The bargaining power of suppliers refers to the degree to which suppliers can dictate prices and terms to firms within an industry. Factors that increase this power include a small number of suppliers and a lack of substitute inputs.
The bargaining power of buyers, on the other hand, refers to the degree to which buyers can negotiate lower prices and better terms from firms within an industry. Factors that increase this power include a small number of buyers and a lack of differentiation among firms’ products.
The threat of substitute products or services refers to the risk of alternative products or services fulfilling the same customer needs. Factors that increase this threat include the availability of close substitutes and low switching costs for customers.
Finally, the threat of new entrants refers to the risk of new competitors entering the market and eroding the profitability of existing firms. Factors that increase this threat include low barriers to entry, such as low capital requirements and low switching costs for customers. By analysing the five forces and their impact on a particular industry, businesses can develop effective strategies that enable them to stay ahead of the competition and succeed in their chosen markets.