The Porter’s Five Forces play a crucial role in developing the right strategies for any business to enter into an industry. It helps determine the competitiveness and thus helps analyze and evaluate the right parameters which can help grow the company’s profitability in the long term.
1. New Entrants into an Industry :
This factor determines how easy or hard it is to enter a particular industry. Whenever an industry is profitable and there are very few barriers to entry, rivalry soon intensifies because of the new entrants. More organizations start to compete for the same market share and thus overall profits fall.
This results in, low amount of capital requirement and low customer loyalty because there are many identical products.
2. Bargaining Power of Suppliers :
Strong bargaining power allows suppliers to sell higher priced or low quality raw material to the buyers. This affects the buying firm’s profits because it now has to pay more for the materials.
Suppliers have strong bargaining power when there are few suppliers and many buyers, few substitutes to raw materials exist and suppliers have scarce resources.
3. Bargaining Power of Buyer :
Buyer has power to demand low price and high product quality from the producers if bargaining power is strong. Lower prices mean, lower revenues, a higher quality of material, higher production costs and lower profits for the producer.
Buyers exert strong bargaining power when they are buying in large quantities, when there are few buyers, switching costs to other suppliers are low, many substitutes are available in the market and when buyers become price sensitive.
4. Threat of Substitute :
This means, buyers can easily find substitute products with low prices and high quality. Buyers can switch from one product to the other with very less cost.
5. Rivalry among existing competition :
This factor depends upon how competitive or profitable an industry is and thus, firms have to compete aggressively to obtain the market share which in turn means lower profits.
Reference : Strategic Management Insight (SMI)
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