PORTERS FIVE FORCES

Porter's Five Forces is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979. Porter referred to these forces as the micro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average.

The five forces of porter’s five forces model are as follows:

1. The threat of the entry of new competitors

2. The threat of substitute products or services

3. The bargaining power of customers (buyers)

4. The bargaining power of suppliers

5. The intensity of competitive rivalry

1. The threat of the entry of new competitors

Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. The new entrants face barriers to entry. They need to overcome them to compete successfully. Some of the barriers are capital requirement, customer loyalty, experience, etc. Specialized technology, production and distribution require high capital costs which acts as one of the barrier. The high customer’s loyalty and experience of the established firms also acts as the barriers. Established firms have advantages over the cost or loyalty which makes entry of the new firms difficult.

2. The threat of substitute products or services

Substitute products are competitive products. There are many examples of close substitutes of products and services e.g. tea is substitute for coffee and email is substitute for express delivery mail system.