What is the purpose of the five forces model?
Show
Porters Five ForcesThe Porter's Five Forces analysis was created by Michael Porter, a professor at Harvard Business School in 1979. Since its publication, it has become one of the most popular and highly regarded business strategy tools. Let's take a look at what it is exactly and how businesses can use this tool to guide their strategy. Porter's Five Forces FrameworkPorter's Five Forces is a method for analysing a company's competitive environment. It identifies and analyses five competitive forces that shape the industry. The purpose of Porter's Five Forces is to determine the profit potential of a market. It helps business people understand the relative attractiveness of an industry and the industry's competitive pressure. Each business sector is influenced by the five factors and therefore understanding them and how they apply to an industry can enable a company to implement a suitable business strategy. It can help to make decisions relating to whether to enter a specific industry, increase capacity in a specific industry and develop competitive strategies. The five main forces that make up this model are:
Competitive RivalryThe type of competition can vary depending on the balance of the competitive relationship. The competitive rivalry is high when there are numerous competitors because then consumers can easily switch to competitors offering similar products or services. Similar size companies are likely to be more fierce than when there are large and small companies. It is also worth keeping an eye on the market growth as a growing market allows both companies to grow in sales and a stagnant market means that a market steal is required. Therefore, it is important to know your competitors:
New EntrantsNew entrants to the market can threaten your own sales volume and market share. Therefore, think about how easily this could be done. Entry barriers:
Power of BuyersPower of buyers is an ability that customers have to drive prices lower or higher. Buyers' power is high when there are few large players and proportionally many suppliers. If many sources are available, buyers may shop around for other materials or supplies which may include a risk of losing a key client. Factors determining the power of buyers:
Power of SuppliersPower of suppliers is an ability that suppliers have to drive up the cost of inputs. Opposite to the power of buyers, power of suppliers is high when there are few suppliers. When there are few suppliers, a product is new or specific, it might be difficult and expensive for a company to switch suppliers. Factors determining the power of suppliers:
Threat of SubstitutesMost products can be substituted for other offerings, not necessarily in the same category. This is known as the threat of substitutes. There are several types of substitution:
Porter's Five Forces in Practice with ExampleLet's take a look at Porter's Five Forces in action with a detailed example of the airline industry. Competitive RivalryCharacteristics:
The airline industry is very competitive. No matter where a company is based, how big it is and what types of services it offers, the competitive rivalry among existing competitors is high. New EntrantsEntry barriers:
New entrants would face many difficulties when entering the market. Therefore, you should not worry about new competitors. Power of BuyersCharacteristics:
Power of buyers seems to be very high. There are many customers who are able to choose from many different services at different prices. Power of SuppliersCharacteristics:
Power of suppliers appears as moderate. They are able to raise prices since there are few suppliers and it is tough to change a supplier. However, there are not many competitive suppliers and it might be difficult for them to offer a new, unique product. Threat of SubstitutesIt is hard to substitute a plane with any other type of transport since many destinations are reachable this way only. In the future there might be some inventions which will substitute planes, but for now you should not worry about them. Limitations of the Porter's Five Forces
Porter's Five Forces - Key Takeaways
Frequently Asked Questions about Porters Five ForcesPorter's five forces are: A business would use porter's five forces to analyse the market competition. Each of the five forces must be analysed individually before conducting a collective analysis. Strategic decisions can be taken by using five forces framework with other important analyses. Check competition, find new entrants, gauge the power of buyers and suppliers, and check threats of substitution. For example, airline industry shows the fierce competitive rivalry within the industry. Final Porters Five Forces Quiz
Question What is Porter’s Five Forces? Show answer Answer Porter’s Five Forces is a method for analyzing a company's competitive environment. Show question
Question What is the purpose of the Porter’s Five Forces? Show answer Answer The purpose of the Porter’s Five Forces is to determine the profit potential of a market. It helps business people understand the relative attractiveness of an
industry and the industry's competitive pressure. Show question
Question What are the five forces? Show answer Answer Competitive rivalry, new entrants, power of buyers, power of suppliers, threat of substitutes. Show question
Question What is meant by new entrants? Show answer Answer New entrants are enterprises entering the market which can pose a potential threat to the already existing businesses. Show question
Question What are the limitations of the Porter’s Five Forces? Show answer Answer It is very general and tends to be subjective. Show question
Question What is the competitive rivalry high? Show answer Answer The competitive rivalry is high when there are numerous competitors because then consumers can easily switch to competitors offering similar products or services. Show question
Question What is the power of buyers? Show answer Answer Power of buyers is an ability that customers have to drive prices lower or higher. Show question
Question Give an example of a factor deremining the power of buyers. Show answer Answer Any of:
Show question
Question What is the power of suppliers? Show answer Answer Power of suppliers is an ability that suppliers have to drive up the cost of inputs. Show question
Question Give an example of a factor determining the power of suppliers. Show answer Answer Any of:
Show question
Question What is meant by the threat of substitutes? Show answer Answer Most products can be substituted for other offerings, not necessarily in the same category. Show question
Question Give an example of a type of substitution. Show answer Answer Any of:
Show question
Question What is a need-based substitution? Show answer Answer The same product, but better, improved. Show question
Question Give two examples of entry barriers for new entrants. Show answer Answer Any two of:
Show question
Question Give two examples of things to know about competitiors. Show answer Answer Any two of:
Show question
Question Porter's Five Forces is a method for analysing a company's... Show answer
Question Economies of scale, capital cost of entry, expected retaliation, brand loyalty, government policies and specialist knowledge are ___ for new entrants. Show answer
Question One of Porter's Five Forces is threat of ___ . Show answer
Question Power of buyers is an ability that customers have to drive ___ lower or higher. Show answer
Question Number of suppliers, size of suppliers, uniqueness of the product or service, suppliers' ability to substitute and switching costs are factors determining... Show answer
Question A camera can be replaced with a smartphone. What type of substitution is it? Show answer
Question Competitive rivalry is high when there are only few competitors. Show answer
Question An ability that suppliers have to drive up the cost of inputs is called... Show answer
Question Similar size companies are likely to be more fierce than when there are large and small companies. Show answer
Question Most products can be substituted for other offerings, not necessarily in the same category. Show answer
Question Imagine that you have decided to buy a holiday. What type of substitution is it? Show answer
Question When there are few suppliers, a product is new or specific, it should be easy and cheap for a company to switch suppliers. Show answer
Question Some of Porter's Five Forces are Power of Suppliers and Power of ___ . Show answer
Question In the case of the airline industry, why is the threat of substitutes low? Show answer Answer Because it is hard to substitute a plane with any other type of transport since many destinations are reachable this way only. Show question Discover the right content for your subjectsNo need to cheat if you have everything you need to succeed! Packed into one app!Study PlanBe perfectly prepared on time with an individual plan. QuizzesTest your knowledge with gamified quizzes. FlashcardsCreate and find flashcards in record time. NotesCreate beautiful notes faster than ever before. Study SetsHave all your study materials in one place. DocumentsUpload unlimited documents and save them online. Study AnalyticsIdentify your study strength and weaknesses. Weekly GoalsSet individual study goals and earn points reaching them. Smart RemindersStop procrastinating with our study reminders. RewardsEarn points, unlock badges and level up while studying. Magic MarkerCreate flashcards in notes completely automatically. Smart FormattingCreate the most beautiful study materials using our templates. Sign up to highlight and take notes. It’s 100% free. This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Privacy & Cookies Policy |