Porter’s Five Forces Model

In 1980, Porter developed a structure for analyzing the nature and extent of competition within an industry. His argument was that, in every industry, there are at least five competitive forces that establish the nature of competition within that industry. These five forces are discussed below:

1. Buyer’s Bargaining Power. Buyers have the ability to determine which products will move first and which will not. It is through buyers that a company realizes its competitive advantage in the market.
2. Supplies’ Bargaining Power. Individual suppliers may have little power to exercise over other industries in the market as they are much smaller; however, they still have the power, without knowing, to affect the market share. It would be important to establish performance indicators that look at quality, as well as the flexibility to the industry’s request, volume, and price provided.
3. Competitive Rivalry in the Industry Within an industry, there are businesses that compete with one another for the available market share. These businesses either specialize in the production of similar products or differentiated products. These businesses compete with one another on the basis of quality, prices, and performance.
4. Threat of New Entrants. The threat of new entrants to an industry such as the American automobile industry depends on the number of entry barriers available. The higher the entry barriers, the fewer the number of competitors will be in the industry. The American stands to win over the threat of entry into the market because; the government has put strong entry barriers to Multinational corporations (Grant, 2005:102). These barriers include capital costs of entry, legal constraints, and access to distributing channels, among others.
5. Threat of Substitutes. A substitute product is a product that meets the same needs as those met by a product produced by an industry. The extent of the threat from a particular substitute will depend upon two factors: the willingness of buyers to switch to substitute products and the degree to which the value and performance of the substitute can compete with the industry’s product.