Explanation of Five Competitive Forces of Michael Porter.

The Five Forces model of Porter is an Outside-in business unit strategy tool that is used to make an analysis of the attractiveness (value) of an industry structure. The Competitive Forces analysis is made by the identification of 5 fundamental competitive forces:

1. Entry of competitors. How easy or difficult is it for new entrants to start competing, which barriers do exist.
2. Threat of substitutes. How easy can a product or service be substituted, especially made cheaper.
3. Bargaining power of buyers. How strong is the position of buyers. Can they work together in ordering large volumes.
4. Bargaining power of suppliers. How strong is the position of sellers. Do many potential suppliers exist or only few potential suppliers, monopoly?
5. Rivalry among the existing players. Does a strong competition between the existing players exist? Is one player very dominant or are all equal in strength and size.

Sometimes a sixth competitive force is added:

6. Government.

Porter's Competitive Forces model is probably one of the most often used business strategy tools. It has proven its usefulness on numerous occasions. Porter's model is particularly strong in thinking Outside-in.

Threat of New Entrants depends on:

• Economies of scale.
• Capital / investment requirements.
• Customer switching costs.
• Access to industry distribution channels.
• Access to technology.
• Brand loyalty. Are customers loyal?
• The likelihood of retaliation from existing industry players.
• Government regulations. Can new entrants get subsidies?

Threat of Substitutes depends on:

• Quality. Is a substitute better?
• Buyers' willingness to substitute.
• The relative price and performance of substitutes.
• The costs of switching to substitutes. Is it easy to change to another product?

Bargaining Power of Suppliers depends on:

• Concentration of suppliers. Are there many buyers and few dominant suppliers?
• Branding. Is the brand of the supplier strong?
• Profitability of suppliers. Are suppliers forced to raise prices?
• Suppliers threaten to integrate forward into the industry (for example: brand manufacturers threatening to set up their own retail outlets).
• Buyers do not threaten to integrate backwards into supply.
• Role of quality and service.
• The industry is not a key customer group to the suppliers.
• Switching costs. Is it easy for suppliers to find new customers?

Bargaining Power of Buyers depends on:

• Concentration of buyers. Are there a few dominant buyers and many sellers in the industry?
• Differentiation. Are products standardized?
• Profitability of buyers. Are buyers forced to be tough?
• Role of quality and service.
• Threat of backward and forward integration into the industry.
• Switching costs. Is it easy for buyers to switch their supplier?

Intensity of Rivalry depends on:

• The structure of competition. Rivalry will be more intense if there are lots of small or equally sized competitors; rivalry will be less if an industry has a clear market leader.
• The structure of industry costs. Industries with high fixed costs encourage competitors to manufacture at full capacity by cutting prices if needed.
• Degree of product differentiation. Industries where products are commodities (e.g. steel, coal) typically have greater rivalry.
• Switching costs. Rivalry is reduced when buyers have high switching costs.
• Strategic objectives. If competitors pursue aggressive growth strategies, rivalry will be more intense. If competitors are merely "milking" profits in a mature industry, the degree of rivalry is typically low.
• Exit barriers. When barriers to leaving an industry are high, competitors tend to exhibit greater rivalry.