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Porter’s 5 Forces Model
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Brainware University
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n/
Summary
 Porter’s model is based on the understanding
that corporate strategies should meet
opportunities and threats within the external
environment of organizations. The five
competitive forces that Porter has identified
shape every industry as well as every market.
These forces regulate the intensity of
competition, the profitability as well as
attractiveness of an industry.
Brief Overview
Michael E. Porter in his book “Competitive Strategy:
Techniques for Analyzing Industries and Competitors”
developed the model of the Five Competitive Forces
in 1980. This model is an important tool for analyzing
industry structure of organizations in strategic
processes.
The corporate strategy should aim to change these
competitive forces in a way that improves the
organization's position. The Porters model supports
the analysis of an industry's driving forces.
Management can decide how to influence or exploit
particular characteristics of their industry on the basis
of the information derived from the Five Forces
Analysis.
 Michael E. Porter in his book “Competitive Strategy: Techniques for
Analyzing Industries and Competitors” developed the model of the
Five Competitive Forces in 1980. This model is an important tool for
analyzing industry structure of organizations in strategic processes.
 Porter’s model is based on the understanding that corporate
strategies should meet opportunities and threats within the external
environment of organizations. The five competitive forces that
Porter has identified shape every industry as well as every market.
These forces regulate the intensity of competition, the profitability as
well as attractiveness of an industry.
 The corporate strategy should aim to change these competitive
forces in a way that improves the organization's position. The
Porters model supports the analysis of an industry's driving forces.
Management can decide how to influence or exploit particular
characteristics of their industry on the basis of the information
derived from the Five Forces Analysis.
Bargaining Power of Suppliers
Supplier bargaining power is likely to be high
when:
 The market is controlled by a few large suppliers
and not a fragmented source of supply,
 There are no substitute for the specific input,
 The switching costs from one supplier to another
are high,
 The suppliers’ customers are fragmented, so their
bargaining power is low,
 The purchasing industry gains a higher profitability
than the supplying industry,
Bargaining Power of Customers
The bargaining power of customers determines how much
pressure can be imposed by customers on margins and
volumes.
 Customers’ bargaining power appears to be high when
 They purchase large volumes making a concentration of
buyers,
 The supplying industry comprises of a huge number of small
operators
 The supplying industry operates with high fixed costs,
 The product is undistinguishable and can be replaced by
substitutes,
 Customers have low margins and are price-sensitive,
 Customers could produce the product themselves
Threat of New Entrants
The threat of new entries depends on the extent
to entry barriers. These are typically-
 Economies of scale (requirements of minimum
size for profitable operations),
 High initial investments and fixed costs,
 Brand loyalty of customers
 Protected intellectual property like patents,
licenses etc.,
 Scarcity of vital resources like qualified expert
staff
 Access to raw materials is controlled by existing
players,
Threat of Substitutes
The threat of substitutes is determined by
the following factors-
 Brand loyalty of customers,
 Switching costs for customers,
 Close customer relationships,
 The relative price for performance of
substitutes,
 Current trends.
Competitive Rivalry between Existing
Players
Competition between existing players appears
to be high when-
 There are many number of players of almost the
same size,
 Players have similar sort of strategies
 There is less differentiation between players and
their products, so, the price competition is high
 Low market growth rates,
 High exit barriers.

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Porter’s 5 Forces Model- a brief overview

  • 1. Porter’s 5 Forces Model Content Developed By Brainware University https://www.brainwareuniversity.ac.i n/
  • 2. Summary  Porter’s model is based on the understanding that corporate strategies should meet opportunities and threats within the external environment of organizations. The five competitive forces that Porter has identified shape every industry as well as every market. These forces regulate the intensity of competition, the profitability as well as attractiveness of an industry.
  • 3. Brief Overview Michael E. Porter in his book “Competitive Strategy: Techniques for Analyzing Industries and Competitors” developed the model of the Five Competitive Forces in 1980. This model is an important tool for analyzing industry structure of organizations in strategic processes. The corporate strategy should aim to change these competitive forces in a way that improves the organization's position. The Porters model supports the analysis of an industry's driving forces. Management can decide how to influence or exploit particular characteristics of their industry on the basis of the information derived from the Five Forces Analysis.
  • 4.  Michael E. Porter in his book “Competitive Strategy: Techniques for Analyzing Industries and Competitors” developed the model of the Five Competitive Forces in 1980. This model is an important tool for analyzing industry structure of organizations in strategic processes.  Porter’s model is based on the understanding that corporate strategies should meet opportunities and threats within the external environment of organizations. The five competitive forces that Porter has identified shape every industry as well as every market. These forces regulate the intensity of competition, the profitability as well as attractiveness of an industry.  The corporate strategy should aim to change these competitive forces in a way that improves the organization's position. The Porters model supports the analysis of an industry's driving forces. Management can decide how to influence or exploit particular characteristics of their industry on the basis of the information derived from the Five Forces Analysis.
  • 5. Bargaining Power of Suppliers Supplier bargaining power is likely to be high when:  The market is controlled by a few large suppliers and not a fragmented source of supply,  There are no substitute for the specific input,  The switching costs from one supplier to another are high,  The suppliers’ customers are fragmented, so their bargaining power is low,  The purchasing industry gains a higher profitability than the supplying industry,
  • 6. Bargaining Power of Customers The bargaining power of customers determines how much pressure can be imposed by customers on margins and volumes.  Customers’ bargaining power appears to be high when  They purchase large volumes making a concentration of buyers,  The supplying industry comprises of a huge number of small operators  The supplying industry operates with high fixed costs,  The product is undistinguishable and can be replaced by substitutes,  Customers have low margins and are price-sensitive,  Customers could produce the product themselves
  • 7. Threat of New Entrants The threat of new entries depends on the extent to entry barriers. These are typically-  Economies of scale (requirements of minimum size for profitable operations),  High initial investments and fixed costs,  Brand loyalty of customers  Protected intellectual property like patents, licenses etc.,  Scarcity of vital resources like qualified expert staff  Access to raw materials is controlled by existing players,
  • 8. Threat of Substitutes The threat of substitutes is determined by the following factors-  Brand loyalty of customers,  Switching costs for customers,  Close customer relationships,  The relative price for performance of substitutes,  Current trends.
  • 9. Competitive Rivalry between Existing Players Competition between existing players appears to be high when-  There are many number of players of almost the same size,  Players have similar sort of strategies  There is less differentiation between players and their products, so, the price competition is high  Low market growth rates,  High exit barriers.