Michael Porter’s Five Forces Model of Competition

Michael Porter’s Five Forces Model of Competition

Michael E. Porter, a professor of Harvard University developed a model regarding the competition in an industry. It is popularly known as “Five forces model of competition”. This model acts as a tool for diagnosing the competitive environment. This model is one of the most renowned among managers making strategic decisions is the five competitive forces model that determines industry structure. These five forces determine the nature and extent of competition and shape the strategies of firms.

The threat of New Entrants:

A new entrant is an industry represents a competitive threat to established firms. They add new production capacity: i.e.-large advertising or R&D budget.

The various barriers to entry are-

  • Economies of scale
  • Brand loyalty
  • Government Regulation
  • Customer Switching Costs
  • Strong Capital base

Bargaining power of suppliers

Suppliers can have an important effect on an industry’s profit potential. They may pass through their cost increases as higher prices or cut their costs by reducing the quality of their goods and services. Buyers are not significant to strong suppliers. In this way, they are regarded as a threat.

Bargaining power of customers/buyers:

Buyers can use bargaining power over a supplier’s industry by forcing its prices down; reducing the number of goods they purchase from the industry, demanding better quality for the same price etc. Strong buyers can extract profits out of an industry by lowering the prices and increasing the costs

The threat of substitute products

Substitute products refer to the products having an ability to satisfy customer’s needs effectively. The availability of substitute products has an important role in the competition. When relative prices rise above that of a substitute product, customers tend to switch to the substitute.

Rivalry among competitors

Sometimes competitive pressure created by the competitors for the better market position increased sales and market share and competitive advantage. So, these are the five forces of competition.