Porters fives forces model is an excellent model to use to analyse a particular environment of an industry. So for example, if we were entering the PC industry, we would use porters model to help us find out about:
1) Competitive Rivalry
2) Power of suppliers
3) Power of buyers
4) Threats of substitutes
5) Threat of new entrants.
The above five main factors are key factors that influence industry performance, hence it is common sense and practical to find out about these factors before you enter the industry. Lets look at them below.
A starting point to analysing the industry is to look at competitive rivalry. If entry to an industry is easy then competitive rivalry will likely to be high. If it is easy for customers to move to substitute products for example from coke to water then again rivalry will be high. Generally competitive rivalry will be high if:
• There is little differentiation between the products sold between customers.
• Competitors are approximately the same size of each other.
• If the competitors all have similar strategies.
• It is costly to leave the industry hence they fight to just stay in (exit barriers)
Power of suppliers
Suppliers are also essential for the success of an organisation. Raw materials are needed to complete the finish product of the organisation. Suppliers do have power. This power comes from:
• If they are the only supplier or one of few suppliers who supply that particular raw material.
• If it costly for the organisation to move from one supplier to another (known also as switching cost)
• If there is no other substitute for their product.
Power of buyers
Buyers or customers can exert influence and control over an industry in certain circumstances. This happens when:
• There is little differentiation over the product and substitutes can be found easily.
• Customers are sensitive to price.
• Switching to another product is not costly.
Threat of substitutes
Are there alternative products that customers can purchase over your product that offer the same benefit for the same or less price? The threat of substitute is high when:
• Price of that substitute product falls.
• It is easy for consumers to switch from one substitute product to another.
• Buyers are willing to substitute.
Threat of new entrant
The threat of a new organisation entering the industry is high when it is easy for an organisation to enter the industry i.e. entry barriers are low.
An organisation will look at how loyal customers are to existing products, how quickly they can achieve economy of scales, would they have access to suppliers, would government legislation prevent them or encourage them to enter the industry. So to summaries porters five forces model is essential to carry to help you understand your industry in depth before you enter it.