What Is a Porter’s Five Forces Framework?
Porter's five forces framework is a management tool used to analyze the competitive environment of a business or industry. It is a tool that firms can use to make better business decisions, by looking at five main forces that affect their competitive position in the market:
Supplier Power: The ability of suppliers to influence prices and terms of sale
Buyer Power: The ability of buyers to influence prices and terms of sale
Competitive Rivalry: The strength of competition among existing players in the market
New entrants: The ease of entry into the market by potential new competitors
Substitutes: The existence of alternative products or services which can satisfy the same need
By analyzing the five forces, firms can develop strategies to increase their competitiveness and profitability.
1. Competitive Rivalry
Assess the potential impact of competitive rivalry. Gauge competitive intensity in terms of pricing pressures, competitive differentiation, etc.
2. Supplier Power
Understand the bargaining power of suppliers. Identify the impact of supplier pricing, supplier concentration and availability, and pressure points that suppliers could exercise in the marketplace.
3. Buyer Power
Evaluate the bargaining power of buyers. Estimate the influence that customers have on pricing and impacting the industry. Consider the number of customers, their buying power, switching costs and availability of substitutes.
4. New Entrants
Assess threats from new entrants. Assess how easy or difficult it would be for new players to enter the industry, including the impact of economies of scale, regulatory barriers, access to capital and distribution channels.
Consider the impact of substitute products. Identify the presence of substitute products, their performance and price, and determining the overall impact of substitutes on the industry.
6. Overall Impact
Analyze the overall impact of the five forces
Examine the impact of the five forces, and how they shape industry structure and profitability. Consider making changes to internal strategy or operations to adjust to changes in the overall landscape.