Porter's Five Force Analysis

Michael Porter’s five force analysis deals with factors outside an industry that influence the nature of competition within it, the forces inside the industry that influence the way in which firms compete, and so the industry’s likely profitability. A business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace. Porter defined the forces which drive competition, contending that the competitive environment is created by interaction of five different forces acting on a business. In addition to rivalry among existing firms and the threat of new entrants into the market, there are also the forces of supplier power, the power of the buyers, and the threat of substitute products or services. Porter suggested that the intensity of competition is determined by the relative strengths of these forces.

Main Aspects of Porter’s Five Forces Analysis

The original competitive forces model, as proposed by Porter, identified five forces which would impact on an organization’s behaviour in a competitive market. These include the following:

• The rivalry between existing sellers in the market.

• The power exerted by the customers in the market.

• The impact of the suppliers on the sellers.

• The potential threat of new sellers entering the market.

• The threat of substitute products becoming available in the market.

Understanding the nature of each of these forces gives organizations the necessary insights to enable them to formulate the appropriate strategies to be successful in their market.

Force 1: The Degree of Rivalry

The intensity of rivalry, which is the most obvious of the five forces in an industry, helps determine the extent to which the value created by an industry will be dissipated through head-to-head competition. The most valuable contribution of Porter's “five forces” framework in this issue may be its suggestion that rivalry, while important, is only one of several forces that...