Created by Michael E Porter in 1979, this model is used when you want to understand the forces that will impact your business. Then, Porter’s 5 forces make organizations understand the impact of the forces.
It also helps to analyze the industry structure and the corporate strategy. Porter’s 5 forces help to measure the competition intensity, attractiveness and profitability of the industry or market.
Five competitive forces are: –
- Competition in the industry
- Potential of new entrant into the industry
- Power of supplier
- Power of customer
- The threat of substitute product
Porter’s 5 forces
Competition in the industry
This force helps to analyze several competitors and their ability to take market share from the company. The number of competitors will be high in the number and the equivalent product, the lesser the company’s power.
Suppliers and buyers try to take advantage of this competition to get a better deal from the industry.
Potential of new entrant into an industry
The company is also being affected by the potential of the new entrant. When lower resources are required for a new entrant to enter the market thus, higher competition will generate, thus decreasing the overall company power in the industry.
Power of supplier
The power of suppliers is noticed by how easily they increase the input cost. It depends on the unique material supplied and the shifting cost incurred by the organization. If there are fewer suppliers in the market, then the industry would be dependent on them, thus increasing the overall price of the product
Power of customer
The customer’s power is their ability to drive the price of the good. It is being affected by the number of total customers the company has and their significance. And cost incurred by the company to find a new customer or market for its output. A smaller and more powerful client base means they would possess more power to negotiate for the lower price.
The introduction of e-commerce could reduce this power.
Threat of substitute
Your customer would likely find a new product that will help them achieve the goal they achieved by using the product offered by the organization. This customer behavior will be a threat as the organization’s total revenue will reduce.
Conclusion
Organizations should keep developing their product and offering and not depend on a single supplier for the critical component. Furthermore, the power of different elements is analyzed by using porter’s 5 forces before making the decision.
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