what are porters 5 forces?
- bargaining power of suppliers
- barganing power of customers
- threat of new entrants
- threat of substitutes
- rivalry among existing businesses
benefits of porters 5 forces
- improve profit
- helps adjust strategy to suit their competitive environment
- achieve strategy
- helps understand the forces involved in decision making
limitations of porters five forces
- markets are dynamic and evolve
- doesnt account for inc/dec size of a market
- ignores things like legal aspects that are in other models
uses of porters five forces:
- helps analyse current market position
- uses SWOT/PESTLE
- uses to make tactical/strategic decisions
BARGAINING POWER OF SUPPLIERS
- Limit power of suppliers by looking for new suppliers
- Backward vertical integration - merge or takeover the supplier
- If a firm’s suppliers have bargaining power, they will:
Exercise that power, Sell their products at a higher price, Squeeze industry profits
Suppliers find themselves in a powerful position when:
- There are only a few large suppliers
- The resource they supply is scarce
- The cost of switching to an alternative supplier is high
- The product is easy to distinguish and loyal customers are reluctant to switch
BARGAINING POWER OF CUSTOMERS
- Forward vertically integrate
Powerful customersare able to exert pressure to drive down prices, or increase the required quality for the same price, and therefore reduce profits in an industry.
Customers tend to enjoy strong bargaining power when:
- There are only a few of them
- The customer purchases a significant proportion of output of an industry
- They can choose from a wide range of supply firms
- They find it easy and inexpensive to switch to alternative suppliers
THREAT OF NEW ENTRANTS
- Create barriers to entry to prevent new entrants, e.g.
- Heavily advertise to build strong brands
- Competitive/predatory pricing
If new entrants move into an industry they will gain market share & rivalry will intensify.
Ifbarriers to entryare low then the threat of new entrants will be high, and vice versa.
THREAT OF SUBSTITUTES
- Continuously invest in R&D and develop patents
- Buy up patents of rivals and shelve to prevent product production
- Increase the elasticity of your product
The extent of the threat depends upon
- The extent to which the price and performance of the substitute can match the industry’s product
- The willingness of customers to switch
- Customer loyalty and switching costs
If there is a threat from a rival product the firm will have to improve the performance of their products by reducing costs and therefore prices and by differentiation.
RIVALRY AMONGST EXISTING FIRMS IN THE INDUSTRY
Degree of marketing/promotion
Ability to keep prices/costs down
Levels of innovation
Mergers / takeovers
If there is intense rivalry in an industry, it will encourage businesses to engage in
- Price wars (competitive price reductions),
- Investment in innovation & new products
- Intensive promotion (sales promotion and higher spending on advertising)
All these activities are likely to increase costs and lower profits.
