Porter's Five Forces

Porter's Five Forces

1. Threat of New Entrants

   • Greatest where there are low barriers to entry
   • New entrants may already be active in a similar market sector, but in a different geographic market. The threat becomes a reality if they try and expand into your geographic market
     • E.g. Budget airlines expanding into new bases and therefore taking over existing routes
   • New entrants may arrive from outside the industry

2. Threat of Substitute Products

   • Likely to emerge from alternative technologies
   • Substitutes may change the whole economics of an industry and threaten the survival of manufacturers of the traditional product
   • E.g. typewriters taken over by PCs. Almost non-existant now
   • E.g. sugar manufacturers threatened by new artificial sweeteners

3. Intensity of Rivalry between Competing Firms

   • May be high if two or more firms are fighting for dominance in a fast-growing market
     • E.g. early mobile phone market
   • May be a fight to establish dominant technology
     • E.g. Blu-ray Vs HD-DVD
   • Companies are likely to engage heavily in promotional activity involving advertising and promotional incentives to buy
   • In mature industries (especially with fixed costs and excess capacity), the intensity of competitive rivalry may be very high

4. The Power of Suppliers

   • Likely to be high if the number of suppliers is small and/or the materials, components, and services they offer are in short supply

5. The Power of Buyers

   • Likely to be high if there are relatively few buyers, if there are many alternative sources of supply, and if buyers incur only low costs in switching between suppliers
     • E.g. grocery shopping