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What are Porter's Five Forces?

By Davies Zhai - Jetek Staff

Porter's Five Forces is a model that identifies and analyzes five competitive forces that shape every industry and helps determine an industry's weaknesses and strengths. These five forces are the intensity of rivalry among competitors, the threat of entrants, the bargaining power of suppliers, the bargaining power of buyers, and the threat of substitutes. The stronger and more competitive these forces are, the less likely the focal firm is able to earn above-average returns and vice versa.

1. Rivalry among Competitors

There are mainly six conditions to cause intense rivalry:

● A large number of competing firms

● Rivals are similar in size, influence, and product offerings

● High-price, low-frequency, “big ticket” purchases

● Capacity is added in large increments

● Industry slow growth or decline

● High exit costs

2. Threat of entrants

In addition to keeping an eye on existing rivals, established firms in an industry-incumbents-also have a vested interest in keeping potential new entrants out.

● Little scale-based advantages (economies of scale)

● Little non-scale-based advantages

● Inadequate product proliferation

● Insufficient product differentiation

● Little fear of retaliation because of the focal firm’s lack of excess capacity

● No government policy banning or discouraging entry

3. Bargaining power of suppliers

Suppliers are organizations that provide inputs such as materials, services, and manpower to firms in the focal industry.

● A small number of suppliers

● Suppliers provide unique, differentiated products

● Suppliers are willing and able to integrate forward vertically

4. Bargaining power of buyers

From the perspective of buyers, individual or corporate, firms in the focal industry are essentially suppliers.

● A small number of buyers

● Buyers purchase standard, undifferentiated products from the focal firm

● Buyers are willing and able to integrate backward vertically

5. Threat of substitutes

Substitutes are products and services of different industries that satisfy customer needs currently met by the focal industry.

● Substitutes are superior to existing products in quality and function

● Switching costs to use substitutes are low

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