2.3: 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.
