The Six Forces Model developed by Porter is a tool that determines the competition level in any industry and the attractiveness of the industry. The six Forces are:
• Competition – this parameter is determined by the number of the competitors and their aggressiveness. If in your industry you have many competitors, and your competitors might be drawn into price wars, this will cause the profit rate to drop towards a competitive level (perfect competition) • New Entrants – if your industry is highly profitable and doesn’t have any barriers to entry, many companies will enter your industry. This may cause the profit rate to drop towards a low, competitive level (perfect competition). If your industry has many entrance barriers such as high fixed costs, patent laws etc. your profit will soar. For example, if your company has a patent on any product, you can sell this product at almost any price you want without fearing any competition (but if you know the demand curve you’ll set the product price in such way that will lead to highest rate of profit).
Porter's Old 5 Forces Model
• End users/Buyers/costumers – this parameter is the bargaining power of the customer. If the product, like luxury products, is not necessary to the customer he might buy it at a lower price. If on the other hand the customer depends on this product, he might pay much more. This is the case for essential goods such as gas and water. In other words the parameter describes the ability of customers to put the firm under pressure and also the reaction of the customers to price changes. • Suppliers – every company needs a supply of materials in order to make new products. These materials can be components, labor, and services, etc. Suppliers may refuse to work with a firm, such as many Arab countries that sell trade oil to Israel. Or suppliers may charge excessively high prices for unique resources like highly trained workers. • Substitutes (Product or service) – the existence of similar...
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