Five forces model Porter
Five forces model of Porter - The five forces model from Michael Porter is the framework for determining the competitiveness of an industry. The more competitive an industry, the less attractive it is. The five forces model consists of 5 different forces, namely:
- Threat of new entrants
- Threat of substitutes
- Bargaining power of buyers (customers)
- Bargaining power of suppliers
- Intensity of competition within the industry
Below, we briefly discuss each part of Michael Porter's five forces model.
Five forces model Porter - Force 1: Threat of new entrants
The first of the five forces is the threat of new entrants. Within this part of the framework you ask yourself whether it is easy to enter the market. For example, are there barriers to entering the market like high start-up costs (for example, do you first have to build an entire factory or can cost be prevented by outsourcing), is the market protected by patents, for example, and can buyers easily switch suppliers?
Five forces model Porter - Force 2: Threat of substitutes
The second of Michael Porter's five forces is the danger of substitutes. A substitute is a replacement product or service. For example, customers of a cable company can choose to watch TV via cable, but they can also opt for the Digitenne substitute. In addition, people can choose to use the internet instead of watching TV. In that case, the Internet is a substitute for TV (and if the consumer was no longer allowed to watch TV at all) even for the cable company. I think it goes without saying that if there are many substitutes or can be developed, the industry is less attractive.
Five forces model Porter - Force 3: Bargaining power of buyers (customers)
The third of the five forces is the bargaining power of buyers. If there are only a few buyers, and many providers, Michael Porter argues, the selling party will have to compete more, so the market is less attractive. An example of an industry where customers have a lot of power is the car industry. There are only a limited number of car manufacturers. The market is huge, so as a supplier you can supply a part for a car, that immediately means a lot of turnover. Many suppliers of car manufacturers are completely dependent on the car manufacturer and therefore have little negotiating power. You can already guess what this does with the supplier's margins.
Five forces model Porter - Strength 4: Bargaining power of suppliers
The fourth force of the five forces resembles force 3, but on the supplier's side. A lot of choice in suppliers means that as a company you will be able to buy cheaper, but there are also industries where the supplier has a lot of power, for example, because the supplier sells a scarce commodity. An example of this is Intel, which has a lot of market power among computer producers because consumers want an Intel processor in their computer. If you want to enter a market as a company where suppliers have a lot of power, then the market is obviously less attractive to enter.
Five forces model Porter - Force 5: Intensity of competition within the industry
In the last part of the five forces of Michael Porter, you will look at the direct competitors who are already active on the market. Here you can ask yourself the following questions:
- How many competitors are there?
- How big are the competitors?
- How fast is the industry growing?
- What is the ratio of fixed costs to variable costs?
- What are the barriers to withdrawing from the market?
According to some, Michael Porter could add a sixth force, and that is the power of the government, consumers, and interest groups. The government can of course exert a great deal of influence on an industry through legislation and regulations, subsidies or government support. Consumers have a lot of power and could, therefore, be added as sixth, because consumers have more and more power. If an industry has a bad reputation, and a company wants to step into this industry, interest groups could use their power, and a successful start might fail.
About the five forces model of Michael Porter
Michael Porter developed the five forces model in 1979.
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