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Porter Five Forces

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Porter's Five Forces Model: analysing industry structure
Author: Jim Riley Last updated: Sunday 23 September, 2012
Overview of the Five Forces Model Porter identified five factors that act together to determine the nature of competition within an industry. These are the: Threat of new entrants to a market Bargaining power of suppliers Bargaining power of customers (“buyers”) Threat of substitute products Degree of competitive rivalry

He identified that high or low industry profits (e.g. soft drinks v airlines) are associated with the following characteristics:

Let’s look at each one of the five forces in a little more detail to explain how they work. Threat of new entrants to an industry If new entrants move into an industry they will gain market share & rivalry will intensify The position of existing firms is stronger if there are barriers to entering the market If barriers to entry are low then the threat of new entrants will be high, and vice versa Barriers to entry are, therefore, very important in determining the threat of new entrants. An industry can have one or more barriers. The following are common examples of successful barriers:
Barrier Investment cost Notes High cost will deter entry High capital requirements might mean that only large businesses can compete Lower unit costs make it difficult for smaller newcomers to break into the market and compete effectively Each restriction can act as a barrier to entry E.g. patents provide the patent holder with protection, at least in the short run Existing products with strong USPs and/or brand increase customer loyalty and make it difficult for newcomers to gain market share A lack of access will make it difficult for newcomers to enter the

Economies of scale available to existing firms Regulatory and legal restrictions Product differentiation (including branding) Access to suppliers and

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