Rivalry In the traditional economic model, competition among rival firms drives profits to zero.
Since its publication init has become one of the most popular and highly regarded business strategy tools. Porter recognized that organizations likely keep a close watch on their rivals, but he encouraged them to look beyond the actions of their competitors and examine what other factors could impact the business environment.
He identified five forces that make up the competitive environment, and which can erode your profitability. This looks at the number and strength of your competitors.
How many rivals do you have? Who are they, and how does the quality of their products and 5 porters compare with yours? Where rivalry is intense, companies can attract customers with aggressive price cuts and high-impact marketing campaigns.
This is determined by how easy it is for your suppliers to increase their prices.
How many potential suppliers do you have? How unique is the product or service that they provide, and how expensive would it be to switch from one supplier to another? The more you have to choose from, the easier it will be to switch to a cheaper alternative. But the fewer suppliers there are, and the more you need their help, the stronger their position and their ability to charge you more.
That can impact your profit.
Here, you ask yourself how easy it is for buyers to drive your prices down. How many buyers are there, and how big are their orders? How much would it cost them to switch from your products and services to those of a rival? Are your buyers strong enough to dictate terms to you? When you deal with only a few savvy customers, they have more power, but your power increases if you have many customers.
This refers to the likelihood of your customers finding a different way of doing what you do. For example, if you supply a unique software product that automates an important process, people may substitute it by doing the process manually or by outsourcing it. A substitution that is easy and cheap to make can weaken your position and threaten your profitability.
Threat of New Entry. So, think about how easily this could be done. How easy is it to get a foothold in your industry or market?
How much would it cost, and how tightly is your sector regulated? If it takes little money and effort to enter your market and compete effectively, or if you have little protection for your key technologies, then rivals can quickly enter your market and weaken your position.
If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it. Adapted with permission from Harvard Business Review.
The Five Forces are brought together in Figure 1, below. According to Porter, these Five Forces are the key sources of competitive pressure within an industry. He stressed that it is important not to confuse them with more fleeting factors that might grab your attention, such as industry growth rates, government interventions, and technological innovations.
Using the Tool To understand your situation, look at each of the forces in turn, then write your observations on our free worksheet. Brainstorm the relevant factors for your market or situation, and then check against the factors listed for the force in the diagram above.
Next, write the key factors on the worksheet, and summarize the size and scale of the force on the diagram. For a neutral force, you can use "o. Finally, look at the situation that you find using this analysis and think through how it affects you.
Bear in mind that few situations are perfect — however, looking at things in this way helps you to think through what you could change to improve your industry position and increase your profitability with respect to each force.
Finding This Article Useful?Although, Porter’s five forces is a great tool to analyze industry’s structure and use the results to formulate firm’s strategy, it has its limitations and requires further analysis to be done, such as SWOT, PEST or Value Chain analysis.
Example. Porter's Five Forces Model Porter's Five Forces Model adalah salah satu framework untuk menganalisis strategi dan perencanaan sebuah organisasi dari sisi eksternal (De Swaan Arons & Waalewijn by bangemile Porter's 5 Forces is a model that identifies and analyzes the competitive forces that shape every industry, and helps determine an industry's weaknesses and strengths.
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If you are not familiar with the five competitive forces model, here is a brief background on who developed it, and why it is useful. The model originated from .