Porter's Five Forces Model of Industry Structure

Topics: Barriers to entry, Strategic management, Porter five forces analysis Pages: 2 (604 words) Published: July 30, 2012
Porter's Five Forces Model of Industry Structure
An industry is a group of firms that market products which are close substitutes for each other (e.g. car industry, travel industry). Some industries are more profitable than others. Why? The answer lies in understanding the dynamics of competitive structure in an industry. The most influential analytical model for assessing the nature of competition in an industry is Michael Porter's Five Forces Model, which is described below:

Porter explains there are five forces which determine industry attractiveness and long-run industry profitability. The five "competitive forces" are 1) Threat of entry of new competitors (new entrants)

2) Threat of substitutes
3) Bargaining power of buyers
4) Bargaining power of suppliers
5) Degree of rivalry between existing competitors

Threat of New Entrants
An industry can raise the level of competition, thereby reducing its attractiveness. Threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries(e.g. shipbuilding) whereas other industries are very easy to enter (e.g.estate agency, restaurants).Keybarriers to entry include economies of scale capital , investment requirements, customer switching costs, access to industry distribution channels. The likelihood of retaliation from existing industry players. Threat of Substitutes

The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on buyers' willingness to substitute, relative price and performance of substitutes and costs of switching to substitutes. Bargaining Power of Suppliers

Suppliers are the businesses that supply materials & other products into the industry. The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company's profitability. If suppliers have high bargaining power over a company, then in...
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