Porter’s five forces model focuses on the micro environment or Industry environment influencing an organization. This model is some time used to evaluate the attractiveness of an Industry to conclude that whether an organization should go for investment in that industry or not. It is also used by the organizations to determine competitive environment of the industry to evaluate its position in the industry. In this model Michael porter states five factors or forces that usually affect attractiveness of the industry plus position of the organization.
1 Threat of new entrants
Its mean how easy or difficult it is for new entrants to enter into the industry. It is a threat because entry of new competitor may reduce the profitability of existing firms or organizations. If an industry have a growth or have high profitability then the threats for new entrants may be high. Further more if there are no strong barriers for new entrant to entry then again threat may be high.
Barriers to entry:
- Economy of scale i.e. initially it will be unable for new entrant to produce goods on cost produced by existing firms.
- If there are high Capital or investment requirements, it may act as barrier.
- If Customer switching cost is high, it will be hard for new entrant to sell its products or services.
- Is it easy or not to Access the industry distribution channel.
- If existing firms have developed there brand name.
2 Threat of substitutes
Its mean how easy or difficult it is for buyers to switch to competitors products and services.
- The most important point is to determine buyer’s willingness to substitutes.
- What is the relative price, quality and performance of substitutes?
- What is the cost of switching to substitutes for buyers? If switching cost is high for buyers then threat may be low.
3 Bargaining power of suppliers
What is the power of the suppliers to influence organizations? Is there any monopoly? Or how strong is the position of sellers? Are there few or many suppliers?
Bargaining power of suppliers may be high where:
- Many buyers and few dominant suppliers.
- Highly valued products provided by suppliers.
- Industry is not a key customer to supplier.
4 Bargaining power of buyers
Its mean if customers have high bargaining power it may lead to a pressure over organization to cut prices for products or / and quality improvement.
Bargaining power of buyers may be high where:
- Few buyers, many sellers.
- Products are standardized not differentiated.
- Industry is not a key supplier of buyers.
5 Intensity of rivalry
Intensity of rivalry is another force affecting organization which may lead to price war between organizations. Intensity of rivalry usually may be high where:
- There is no clear market leader and equally sized competitors operating in the industry.
- Products or services have low degree of differentiation.
- Switching cost is low.
- Exit barriers for existing firms are high.