Porter’s Five Forces named after Michael E. Porter, is a simple but powerful tool for understanding the competitiveness of your business environment, and for identifying your strategy’s potential profitability.
It helps to identify and analyze five competitive forces that shape every industry and helps to determine an industry’s weaknesses and strengths. These forces are:
Competition in the Industry
The importance of this force is the number of competitors and their ability to threaten a company. The larger the number of competitors, along with the number of equivalent products and services they offer, dictates the power of a company.
Potential of New Entrants into an Industry
A company’s power is also affected by the force of new entrants into its market. The less money and time it costs for a competitor to enter a company’s market and be an effective competitor, the more a company’s position may be significantly weakened.
Power of Suppliers
This force addresses how easily suppliers can drive up the price of goods and services. It is affected by the number of suppliers of key aspects of a good or service, how unique these aspects are and how much it would cost a company to switch from one supplier to another.
Power of Customers
This specifically deals with the ability customers have to drive prices down. It is affected by how many buyers, or customers, a company has, how significant each customer is and how much it would cost a customer to switch from one company to another.
Threat of Substitutes
This force is especially threatening when buyers can easily find substitute products with attractive prices or better quality and when buyers can switch from one product or service to another with little cost.
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