Porter Five Forces Essay

1266 Words Jun 27th, 2014 6 Pages
Porter's Five Forces Model: analysing industry structure
Author: Jim Riley Last updated: Sunday 23 September, 2012
Overview of the Five Forces Model Porter identified five factors that act together to determine the nature of competition within an industry. These are the: Threat of new entrants to a market Bargaining power of suppliers Bargaining power of customers (“buyers”) Threat of substitute products Degree of competitive rivalry

He identified that high or low industry profits (e.g. soft drinks v airlines) are associated with the following characteristics:

Let’s look at each one of the five forces in a little more detail to explain how they work. Threat of new entrants to an industry If new entrants move into an industry they
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The following table helps summarise the issues you should consider:
Easy to Enter Common technology Access to distribution channels Low capital requirements No need to have high capacity and output Absence of strong brands and customer loyalty Difficult to Enter Patented or proprietary know-how Well-established brands Restricted distribution channels High capital requirements Need to achieve economies of scale for acceptable unit costs

Bargaining power of suppliers If a firm’s suppliers have bargaining power they will: Exercise that power Sell their products at a higher price Squeeze industry profits If the supplier forces up the price paid for inputs, profits will be reduced. It follows that the more powerful the customer (buyer), the lower the price that can be achieved by buying from them. Suppliers find themselves in a powerful position when: There are only a few large suppliers The resource they supply is scarce The cost of switching to an alternative supplier is high The product is easy to distinguish and loyal customers are reluctant to switch The supplier can threaten to integrate vertically The customer is small and unimportant There are no or few substitute resources available Just how much power the supplier has is determined by factors such as:
Factor Uniqueness of the input supplied Number and size of firms

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