The Five Forces Analysis was developed by Michael Porter in 1979.
It is an extremely useful tool when determining the potential profitability of a new entrant in a particular industry. It works by analyzing five essential factors that influence a new entrant in any industry. These factors are classified as follows:
Bargaining Power of Suppliers:
This is the ease with which suppliers in an industry can influence the price of required inputs. It is determined by analyzing how many suppliers are there in the industry; how unique the product or service they offer is; the cost involved in switching from one supplier to the other etc.
The fewer the number of suppliers in an industry the more powerful they become in terms of exercising influence over the price paid for their goods or services.
Bargaining Power of Buyers:
This is the influence that buyers exercise in driving down prices for the goods and services in an industry. It is determined by the number of buyers for the goods and services in the industry and the ease with which they can switch from one provider to the other.
The fewer the buyers in an industry the greater the power that they exercise in determining the prices of goods and services produced in the industry.
The intensity of Competitive Rivalry.
Competition among suppliers in an industry also dictates profitability and how attractive the industry is for new entrants. The greater the number of competitors offering similar products or services at a similar price the harder it is for a new entrant to make a place in the industry.
However, if there are only a few competitors offering a comparative product or service a new entrant has greater power to exercise in the industry.
The Threat of Substitute Products:
Before entering an industry it is very important to analyze the extent to which the goods and services produced by the industry can be replaced by different products or services. Technological advances often render once very profitable industries bankrupt.
Around 10 years ago, a VCR was a very profitable product. But with the advent of the DVD player, the demand and supply of VCRs have dwindled. If substitution for your product is available and can be done easily and cheaply it will greatly weaken your position in the industry.
The Threat of New Entry:
Your profit in an industry is also affected by the ease that potential competitors can enter that particular industry and drive down your profits. If there are no barriers to entry in your industry, if the industry offers greater economies of scale and it is easy to acquire the technical expertise associated with your product or service then potential rivals will find it very easy to gain entry into your industry and take away your competitive advantage.
ABOUT THE AUTHOR: Kate Gardens