Five forces

Another analytical concept developed by Porter is the Five Forces Analysis. It is a useful concept in analyzing the competitive position and strategic challenges of an industry. The five forces are:

• Rivalry among existing firms. Issues to be adressed in this respect are: numerous or equally balanced competitors, slow industry growth, high fixed or storage costs, lack of differentiation or switching costs, capacity augmented in large increments, diverse competitors, and high exit barriers.
• Bargaining power of suppliers. Issues here are: number of suppliers, the degree to which the supplier is obliged to contend with other substituted products, the importance of the industry as a customer of the supplier group, the importance of the supplier‘s product to the buyers business, the degree to which the supplier‘s products are differentiated or it has built up switching costs, and the question whether the supplier group poses a credible threat of forward integration.
• Bargaining power of buyers. Issues here are: the share of individual buyer’s volumes relative to the seller sales, the share of the purchases of key buyer’s as a portion of the buyer’s total costs, standard or undifferentiated products, switching costs, importance of the product to the quality of the buyers’ products or services, and the degree to which the buyer has full information.
• Threat of new entrants. Issues here are: economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, cost disadvantages independent of scales, and government policy.
• Threat of substitute products or services. The main issue here is that of radical technical change, i.e. the emergence of new products or services which offer a better performance and/or a lower price.

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