Porter's 5 Forces model analyzes competitive forces in an industry including the threat of new entrants, power of suppliers and buyers, and threat of substitute products. The model outlines factors that influence barriers to entry like economies of scale, product differentiation, and capital requirements. It also describes how concentrated and high-volume buying groups gain bargaining power over sellers, and how connected suppliers of important inputs gain power if substitutes are unavailable.

3. Porter’s 5 Forces Model
Potential
Entrants
Industry Competition
Rivalry Among
Existing Firms
Suppliers Buyers
Substitutes
Threat of new entrants
Threat of substitute
goods and services
Bargaining
power
of buyers
Bargaining
power
of suppliers

4. Competitive Forces – Some
Examples
• Competitors vying for market share – PC
manufacturing
• New entrants – the relative ease with which
new firms can compete with established
firms – Internet travel agencies
• Substitute goods and services – electronic
gadgets in place of watchmen
• Customers’ bargaining power – forces down
prices, obtain better products at the same
prices
• Suppliers’ bargaining power – raise prices,
increase market share

5. Potential Entrants–Barriers to Entry
• Economies of scale
• Product differentiation
• Capital requirements
• Switching costs
• Government policy
• Cost disadvantages independent of scale

6. Potential Entrants–Barriers to Entry
• Cost disadvantages independent of scale
– Proprietary product technology
– Favourable access to raw materials
– Favourable locations
– Government subsidies
– Learning curve or experience curve

7. Buyers
• A buyer group is powerful if the following
circumstances hold true
– It is concentrated
– Purchases large volumes relative to the
seller’s sales
– Products it purchases from the industry are
standard or undifferentiated

8. Suppliers
• A supplier or supplier group is powerful if
the following circumstances hold true
– Suppliers are connected and have a tacit
agreement
– They supply important ingredients that are
needed by the industry
– Substitutes are not easily available