Porter’s 5 Forces
Porter’s 5 Forces
Porter’s 5 Forces is a framework for analyzing the competitive forces that shape an industry, helping businesses understand their market environment and develop strategies. The five forces are:
- Threat of New Entrants:
The likelihood of new competitors entering the market. High entry barriers reduce this threat. For example, the tech industry has high entry costs due to R&D requirements, limiting new entrants.
- Bargaining Power of Suppliers:
Suppliers’ ability to influence the price and quality of goods. If there are few suppliers, their power increases. An example is the smartphone industry, where major component suppliers can significantly impact costs.
- Bargaining Power of Buyers:
The influence customers have on pricing and quality. When buyers are few or purchase in large volumes, their power increases. For instance, large retailers like Walmart can negotiate lower prices from manufacturers.
- Threat of Substitute Products or Services:
The availability of products that can serve as alternatives. A high threat of substitutes can limit profitability. For example, ride-sharing apps like Uber pose a threat to traditional taxi services.
- Industry Rivalry:
The intensity of competition among existing firms. High rivalry can lead to price wars and reduced profitability. An example is the fast-food industry, where brands compete fiercely for Market Share.