What is Porter’s Five Forces?
Porter’s Five Forces is an analysis tool used to understand the competitive environment of a business and assess the overall industry attractiveness for other market participants.
This instrument encourages individuals to look beyond what their competition is doing, and consider what other factors may influence or impact their business. When using Porter’s Five Forces, you will need to take into account the following forces of the competitive environment:
1. Competitive Rivalry. This force looks at your competition in terms of numbers and strength. This will include the number of competitive businesses that exist, who they are and how the quality of their products and services compare to your own.
2. Supplier Power. How much power do your suppliers have? How easy it is for your suppliers to increase their prices? Do you have many options for potential suppliers? Is the service or product that they provide unique, and would it be expensive for you to switch from one supplier to another?
3. Buyer Power.With this force, you will look at how easy it is for buyers to negatively affect your pricing. Are there many, or few potential buyers? How big are their orders? Would it cost them a lot, or very little to switch to a rival business instead of purchasing from you? Do potential buyers have enough power that they can dictate terms to you?
4. Threat of Substitution.This refers to the chances of your buyers or customers discovering another way of doing what your business does or provides. For example, if it is easier and cheaper for a customer to carry out a task that your company provides as a service, this is a threat to your business’s profitability.
5. Threat of New Entry. Any new competition entering the market can affect your success and profitability, so this force will analyse how easily this could be done. Is it an easy market or industry to start up in? How much would it cost a competitor to enter and become established within your market or industry?
Our Free Generator
Porter’s Five Forces is an important tool for any business-related study. We have therefore developed a clever generator that is simple to use and will save you time and effort in carrying out a Five Forces analysis.
To make use of this resource, think about each force one by one, and then enter Yes/No responses to measure each factor on our generator below, and our analysis tool will produce your results for you. Feel free to use pop-up hints if some choices seem unclear to you.
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