Porters 5 Forces

• What is it?

  The Five Forces Model was devised by Professor Michael Porter. The model is a framework for analysing the nature of competition within an industry
• Factors that cause low profit


  Very intensive competitor rivalry – mainly on price

  Low barriers to entry – lots of new airlines who want to set up

  Suppliers of aircraft & equipment are powerful – can charge high margins

  Customers have lots of substitute options – e.g. rail, car
• FACTORS THAT CAUSE HIGH PROFITS


  • Customers and suppliers have little power – Pepsi has many millions of individual consumers, and thousands of retail distributors none of whom has much influence over the business

  • There is high brand awareness & loyalty = less consumer desire for substitutes

  • High barriers to entry – how do you enter a market dominated by Coca-Cola and Pepsi
• What are the 5 forces?

  -power of customers

  -power of suppliers

  -threats of market entry

  -threat from substitutes

  -intensity of rivalry

  Porter identified five factors that act together to determine the nature of competition within an industry
• Low industry profits associated with...


  Strong suppliers

  Strong customers (buyers)

  Low entry barriers

  Many opportunities for substitutes

  Intense rivalry
• High industry profits associated with...


  Weak suppliers

  Weak customers (buyers)

  High entry barriers

  Few opportunities for substitutes

  Little rivalry
• Threat of New Entrants


  If new entrants move into an industry they will gain market share & rivalry will intensify. The position of existing firms is stronger if there are barriers to entering the market. If barriers to entry are low then the threat of new entrants will be high, and vice versa Barriers to entry are, therefore, very important in determining the threat of new entrants.
• Barriers for entry


  e.g.

  
• What makes an industry easy or difficult to enter?


  Factors -