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PORTER’S 5

FORCES MODEL

1 By
Sujata Sawant
PORTERS 5 FORCES MODEL
 Themodel of the Five Competitive Forces was
developed by Michael E. Porter

 Animportant tool for analyzing an


organizations industry structure in strategic
processes.

 These forces determine the intensity of


competition and hence the profitability and
attractiveness of an industry   2
Porters 5 Forces Model

Threat of New
Entrants 
Entrants

Competitive Rivalry
Bargaining Power  between Bargaining Power
of Suppliers  Existing Players of Customers

Threat of
Substitutes 3
PORTERS 5 FORCES MODEL- 1
Bargaining Power  The term 'suppliers' comprises all sources for
of Suppliers inputs that are needed in order to provide
goods or services

Supplier bargaining power is likely to be


high when:

• The market is dominated by a few large 
suppliers  rather than a fragmented source of 
supply

• There are no substitutes for the particular input
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• The switching costs from one supplier to 
another are high 
PORTERS 5 FORCES MODEL- 2

Bargaining Power Determines how much customers can impose


 of Customers pressure on margins and volumes.

Customers bargaining power is likely to be


high when

• Customers could produce the product themselves 

• The product is not of strategical importance for the 
customer 

• The customer knows about the production costs of 
the product 
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PORTERS 5 FORCES MODEL- 3

The threat of new entries will depend on  the 
Threat of
extent to which there are barriers to entry . 
New Entrants
These are,

• High initial investments and fixed costs
 
• Brand loyalty of customers
 
• Scarcity of important resources, e.g. qualified expert 
staff

• Existing players have close customer relations
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PORTERS 5 FORCES MODEL- 4

A threat from substitutes exists if there are alternative 
Threat of products with lower prices of better performance 
Substitutes parameters for the same purpose 

The threat of substitutes is determined by following factors

• Brand loyalty of customers 

• Close customer relationships 

• Current trends. 

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PORTERS 5 FORCES MODEL- 5

This force describes the intensity of competition 
Competitive Rivalry
between existing players (companies) in an industry
between Existing Players

Competition between existing players is likely to be high
 when

• There are many players of about the same size 

• Players have similar strategies 

• There is not much differentiation between players 
and their products 

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FIVE FORCE ANALYSIS

Three aspects of
 corporate planning  

Statical Analysis Dynamical Analysis

Analysis of Options
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FIVE FORCES ANALYSIS CAN PROVIDE VALUABLE
INFORMATION FOR THREE ASPECTS OF CORPORATE
PLANNING

• Attractiveness of an industry 
Statical Analysis • Insights on profitability 

• Reveal insights about the potential future 
attractiveness of the industry Insights on profitability 
Dynamical Analysis
• Determines potential changes of competitive forces are 
scenarios

• Improves their own competitive position 
Analysis of Options •  A new strategic direction 
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INFLUENCING THE POWER OF FIVE
FORCES
Power of Five Forces

Reducing the
Reducing the  Reducing the Reducing the Reducing the
Competitive Rivalry
Bargaining Bargaining Threat of Threat of
between Existing
Power of Suppliers Power of Customers New Entrants Substitutes
Players

1. Partnering 1. Avoid price


. Partnering
1. Create 1. Increase competition
2.Cut intermedia Brand image switching costs 2. Differentiate
. S.C.M
ries your product    
2.Alliances 3. Communicate
. Increase loyalty 2. Alliances
with competitors
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CRITIQUE
 It does not take into account new business
models & dynamics of market

 Model assumes relatively static market


structures

 Model is not applicable for industries having


a complex structure

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CONCLUSION
 Thus, Porters Model of Five Competitive Forces is a 
simple but powerful tool for understanding where power 
lies in a business situation. It helps to understand both 
the strength of your current competitive position & the 
strength of a position you are looking to move into.

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