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Analysis tools: Porter's five forces

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This framework identifies factors that can help you to understand the strengths and limitations of a particular market/industry. These have been considered briefly below:

Rivalry among existing competitors: refers to the level of competition between existing companies within the industry. Strong rivalry may result from strong buyer/weak supplier power and could indicate that firms aggressively compete to steal customers.

Threat of substitute products or services: a substitute product is one the customer can buy from another industry to satisfy the same (or a similar) need. As customers can choose to buy the product from another industry, this decreases the potential for profit in the industry being analysed. For example, an industry analysis of the airline industry would have to consider the threat of the train, bus and ferry industries. The threat of substitutes is high when (for instance): the substitutes are cheaper; the substitutes are of a higher quality; and there is a low switching cost for consumers.

Bargaining power of suppliers/buyers: these concepts have been explained in detail in the Business Situation Framework section and can affect whether a firm is likely to succeed if it decides to enter a new market.

Barriers to entry/threat of new entrants: when the barriers to enter an industry are high, the threat of new competitors entering the market is lower (as it is more difficult to enter that industry). This can mean that existing companies within the industry have a higher potential to generate profit.

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By Jake Schogger - City Career Series