Business Reviews Blog

The five forces model of Porter is a management tool that allows an external analysis of a company, through analysis of the industry or sector to which it belongs.

This tool takes into account the existence of five forces in an industry:

* Rivalry among competitors
* Threat of new entrants
* Threat of substitute products income
* Bargaining power of suppliers
* Bargaining power of consumers

Sorting these forces thus allow a better analysis of business environment or industry to which he belongs and, thus, based on that analysis, to design strategies to seize opportunities and cope with threats.

1. Rivalry among competitors

Refers to companies that compete directly in the same industry, offering the same product type.

The degree of rivalry among competitor’s increases as raising the amount thereof shall be equal in size and capacity, reduce the demand for products, reduce prices, etc.

The analysis of the rivalry between competitors allows us to compare our strategies or competitive advantages of other competing firms, and thus know, for example, whether to improve or redesign our strategies.

2. Threat of new entrants

Referring to the potential entry of firms selling the same product type.

When trying to enter a new company to an industry, it could have entry barriers such as lack of experience, customer loyalty, substantial capital required, lack of distribution channels, lack of access to inputs, market saturation, etc… But they could also easily enter if they have top quality products to existing ones, or lower prices.

The analysis of the threat of new entry allows us to establish entry barriers that prevent the entry of those competitors, such as the search for economies of scale or to obtain technology and expertise, or, in any case, we can design strategies that address those of such competitors.

3. Threat of substitute products income

Referring to the potential entry of firms that sell substitute or alternative to the industry.

An example of substitute products would be soft drinks may be substituted or competence of mineral waters.

The entry of substitute products puts a cap on the price you can collect before consumers opt for a substitute product.

In analyzing the threat of entry of substitute products allows us to design strategies to prevent the penetration of companies selling their products or, in any case, strategies that allow us to compete successfully.

4. Bargaining power of suppliers

It refers to the ability to negotiate with suppliers who have, for example, while there are fewer suppliers, the greater its bargaining power, since failing to offer much input, they can easily increase their prices.

In addition to the number of suppliers exist, the bargaining power of suppliers may also depend on the volume of purchase, the amount of substitute raw materials that exist, the cost of changing raw materials, etc.

The analysis of the bargaining power of suppliers, allows us to design strategies to achieve better agreements with our suppliers or, in any case, strategies that allow us to buy them or have more control over them.

5. Bargaining power of consumers

It refers to the ability to negotiate with consumers who have or buyers, for example, while there are fewer buyers, the greater its bargaining power, as they are not to be so much demand for products, they can complain about lower prices.

In addition to the number of buyers that exist, the bargaining power of buyers also might depend on the volume of purchases, product shortages, product specialization, etc.

Any industry that is, it is usual that buyers have greater negotiating power with vendors.

The analysis of the bargaining power of consumers or buyers, we can design strategies to attract more customers or obtain greater accuracy or fairness of these, for example, strategies such as increasing advertising or offer more services or warranties.