 According to Michael Porter, 5 competitive forces influence the state of competition in an industry. These collectively determine the profit (i.e. long-run return on capital) potential of the industry as a whole. Using the model of five competitive forces of Porter is often done following analysis of the business environment (conducted via the PESTLE model). The model of 5 competitive forces as the name suggests, focuses on the analysis of the current and future competition leads to the creation of opportunities or threats for the company.
Porter’s 5 competitive forces model thus serves to facilitate the identification of opportunities and threats related to the immediate and future competition. The competitive analysis of a company is essential because competition is inherent in the business. Indeed, it is almost impossible for-profit organization has no competition.
In the mind of Michael Porter, the first of a business objective is the development of a competitive advantage over its competitors. This competitive advantage may, for a company to be measured by its earnings power and generate resources necessary to its continuity in the case of a public organization.
1. Threat of new entrants and potential entrants
The first line of analysis is that newcomers and potential entrants to the enterprise market. These are the barriers to entry on the market which will determine the ease of new entrants to compete with established businesses in the sector. So we will consider whether the current barriers actually prevents new entrants from competing with the company. There are three main types of barriers to market entry or market barriers (access to suppliers, distributors, distribution network and corporate reputation).
The second type of barriers is the financial barrier that contains the exchange rate, the cost of transfers, the possibility to realize economies of scale, flexibility and strength of these competitors. The last type of barrier to entry for new entrants is the barrier of skills and materials containing human capital, natural resources, technological skills, etc.
2. The threat of substitute products or services
As the name suggests, the threat of substitute products or services on the model of 5 competitive forces of competition to bring assess the danger posed by the products or services on the market substitutes. The effect of the substitution of a market is that they can easily reduce the demand for a particular product or an entire category of product and making changes and satisfying customer needs. This threat is often present in the area of technological development, for example.
3. The Purchasing Power of Negotiation and Customers
This axis seeks to assess the bargaining power of buyers and clients. A buyer holding too much bargaining power in the market can easily hold a significant share of the non-profit. One must be able to determine whether current customers could become direct or indirect competitors of the company.
4. Suppliers Bargaining Power
In the same vein as the previous axis, the bargaining power of suppliers trying to assess how the supplier has or could potentially have control over the company. Dependence on a supplier is never good for a organization. When suppliers are a well-organized conglomerate and that customers are competitors, suppliers have a tendency to have a strong bargaining power with its customers (companies).
5. Strategy of Competing Companies
The last point of model of 5 competitive forces of Porter’s strategies and actions taken by competitors. Indeed, in our analysis, we can not overlook the fact that competitors have their own strategy of action and they offer similar products to the same customer segment. It is important to assess the movements of the competition to be able to react properly and not to yield valuable market share to a competitor.
POINT TO REMEMBER: Porter claims that the intensity of the fifth force, competitive rivalry, is driven by the intensity of the other four forces. If these other forces are driving profitability down the firms in the industry will compete more intensely to restore their own profits.
