Porter’s Five Forces is a framework that is used to assess the attractiveness of an industry by analyzing the competitive forces that shape the competition. It was developed by Michael E. Porter, a renowned economist and professor at Harvard Business School. The five forces are: threat of new entrants, bargaining power of suppliers, bargaining power of customers, threat of substitute products or services, and intensity of competitive rivalry.
The importance of the Porter’s Five Forces framework lies in its ability to help businesses make better-informed decisions. By analyzing the competitive forces and understanding their impact, businesses can develop effective strategies to stay competitive and improve their position in the market.
To use the framework, a business must first identify the industry within which it operates. The next step is to assess the five competitive forces present within the industry. For each of the five forces, the business must ask and answer key questions based on the following criteria:
1. Threat of new entrants – Business must ask, “How easy it is for new companies to enter the industry? What are the barriers to entry?”
2. Bargaining power of suppliers – Business must ask, “How much bargaining power do suppliers have? Are there many suppliers or just a few dominant ones?”
3. Bargaining power of customers – Business must ask, “How much bargaining power do customers have? Are there many options for customers?”
4. Threat of substitute products or services – Business must ask, “How many substitute products or services are there? How easy is it to switch to a substitute?”
5. Intensity of competitive rivalry – Business must ask, “How intense is the competition in the industry? Are there many competitors or just a few dominant ones?”
Once these questions are answered, the business can then identify areas where it may be vulnerable to competitive pressures. It can then develop effective strategies to mitigate these pressures and improve its competitive position.
In conclusion, Porter’s Five Forces is an important analytical framework used by businesses to understand the competitive forces within an industry. By using this framework, businesses can make better-informed decisions and develop effective strategies to improve their position in the market.
