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5 Forces Model – Concept
The Five Forces Model studies the five external competitive forces that can threaten a business's profitability.
Supplier Power assesses the influence suppliers have in the industry. Limited competition among suppliers can allow them to dictate terms and prices, negatively affecting a company's profitability.
Buyer Power evaluates the influence customers have over the market. When customers have many options and can easily switch brands, companies must offer value and competitive prices to remain profitable.
The threat of New Entrants considers the ease with which new competitors can enter the market, potentially affecting industry profitability. Barriers to entry, such as capital requirements or regulatory hurdles, make it less attractive for new players.
The threat of Substitutes examines alternative products or services that can fulfill a similar need. The availability of close substitutes can limit a company's ability to fix prices.
The Rivalry Among Existing Competitors assesses the intensity of competition among existing players, which can erode profit margins. Market concentration, industry growth, and competitive tactics contribute to this rivalry.
5 Forces Model – Concept
The Five Forces Model, developed by Michael Porter, offers a systematic approach to assessing the competitive dynamics of an industry, helping organizations understand the forces that can influence their competitive position and profitability.
The Five Forces are:
- • Supplier Power: How much control do suppliers have regarding pricing, quality, or terms? In industries where suppliers are concentrated, and there are limited alternatives, suppliers can dictate terms, impacting the profitability of businesses.
- • Buyer Power: If customers have numerous options and can easily switch between products, there is pressure on companies to provide superior value at competitive prices.
- • Threat of New Entrants: How easy is it for new competitors to enter an industry? Barriers to entry, such as significant capital requirements or stringent regulations, act as deterrents to new players and protect the profits of existing companies.
- • Threat of Substitutes: Substitutes are alternative products or services that can fulfill a similar need. When substitutes are abundant, companies may lose pricing power.
- • Rivalry Among Existing Competitors: It measures industry competition through factors like market concentration, growth, and tactics. Intense rivalry can erode profit margins, prompting innovation and differentiation.