The model Porter's five forces

The model Porter's five forces

The model Porter's five forces is a management tool developed by professor and researcher Michael Porter, to analyze an industry or sector, through the identification and analysis of five forces there.
More precisely, this tool allows to know the degree of competition in an industry and, in the case of a company within it, performexternal analysis serve as a basis for formulating strategies to exploit opportunities and / or face the identified threats.
The five forces that this tool considers there any industry are:

    Rivalry among competitors.
    Threat of entry of new competitors.
    Threat of entry of substitute products.
    Bargaining power of suppliers.
    Bargaining power of consumers.

According to Porter, dividing an industry in these five forces allows a better analysis of the degree of competition in it and therefore more accurate appreciation of its appeal; while in the case of a company within the industry, better analysis of their environment and therefore better identification of opportunities and threats.

A summary of each of these forces:
1. Rivalry among competitors
Generally the most powerful of all, strength refers to the rivalry between firms that compete directly in the same industry, offering the same type of product.
A strong rivalry between competitors could be interpreted as a lot of strategies to outperform other strategies that seek to exploit any sign of weakness in them, or immediate reactions to their strategies or moved.
The rivalry between competitors tends to increase mainly as they increase in number and will equating in size and capacity.
But besides this, the rivalry between competitors often also increase when:

    demand for industry products decreases.
    there is little product differentiation.
    price reductions become common.
    consumers have the ability to easily switch brands.
    fixed costs are high.
    the product is perishable.
    mergers and acquisitions in the industry are common.

As the rivalry between competitors becomes more intense, the industry profits decrease, causing it to become less attractive and therefore decreases the entry of new competitors.
Analyze the rivalry between competitors allows us to compare our competitive advantages with other rival companies, and so we develop strategies to overcome them.
Examples of these strategies are:

    increase product quality.
    reduce prices.
    provide new features to products.
    providing new services.
    increase publicity.
    increase sales promotions.

2. Threat of entry of new competitors
Refers to the potential entry into the industry of companies that produce or sell the same product type.
When companies can easily enter an industry, the intensity of competition increases; however, entering a market is not usually something simple due to the existence of barriers to entry.
Examples of these barriers to entry are:

    the need to quickly achieve economies of scale.
    the need to obtain technology and expertise.
    lack of experience.
    strong consumer loyalty to certain brands.
    large capital needs.
    lack of adequate distribution channels.
    government regulatory policies.
    high tariffs.
    lack of access to raw materials.
    possession of patents.
    market saturation.

But despite these barriers, sometimes companies are able to easily enter an industry where products have a higher than existing, lower prices or better quality advertising.
Analyze the threat of entry of new competitors allows us to be attentive to their income, and so we develop strategies to strengthen barriers to entry, or deal with competitors coming in.
Examples of these strategies are:

    increase product quality.
    reduce prices.
    increase sales channels.
    increase publicity.
    offer better terms of sales, for example, provide more funding or extended warranties.

3. Threat of entry of substitute products
Refers to potential companies that produce or sell alternative products industry revenue.
Examples of substitute products are mineral waters that are substitutes for soft drinks, jams which are substitutes for butter, and Internet portals that are substitutes for newspapers and magazines.
The presence of substitute products usually set a limit to the price that can be charged for a product (greater than this limit price could make consumers choose the substitute product).
Substitute products are usually easily enter an industry where:

    prices of substitute products are low or lower than those of existing products.
    There is little publicity of existing products.
    There is little loyalty in consumers.
    the cost of switching from one product to another substitute is low for consumers.

The analysis of the threat of entry of substitute products allows us to develop strategies to prevent the entry of companies that produce or sell such products or, in any case, strategies that allow us to compete with them.
Examples of these strategies are:

    increase product quality.
    reduce prices.
    increase sales channels.
    increase publicity.
    increase sales promotions.

4. Bargaining power of suppliers
Refers to power with that feature industry suppliers to increase their prices and less concessional.
Generally, the smaller number of suppliers exist, the greater their bargaining power as having no such supply of raw materials, they can easily increase their prices and less concessional.
But besides the number of suppliers that exist in the industry, the bargaining power of these also tends to increase when:

    there are few substitutes for raw materials.
    the cost of changing a raw material to another is high.
    companies make purchases with little volume.

The analysis of the bargaining power of suppliers allows us to formulate strategies to reduce their bargaining power and thus achieve better conditions or increased control over them.
Examples of these strategies are:

    purchased through vendors.
    produce the raw materials you need.
    strategic alliances with suppliers that allow, for example, reduce the costs of both parties.

5. Bargaining power of consumers
Refers to power expected by consumers or industry buyers to get good prices and conditions.
Whatever the industry, it is usual that buyers always have greater bargaining power with vendors; However, this power often have different degrees depending on the market.
In general, while there are fewer buyers, the greater their bargaining as having no such demand product, they can claim for lower prices and better conditions.
But besides the number of buyers that exist in the industry, the bargaining power of these also tends to increase when:

    no product differentiation.
    consumers buy in volume.
    consumers can easily switch to competing brands or substitute products.
    consumers are well informed about products, prices and costs from vendors.
    vendors face a reduction in demand.

The analysis of the bargaining power of consumers allows us to formulate strategies to reduce their bargaining power and thus attract more customers or obtain greater loyalty from them.
Examples of these strategies are:

    seek differentiation in products.
    provide greater aftermarket services.
    provide more and better guarantees.
    increase sales promotions.
    increase communication with the client.

Conclusions
The model Porter's five forces allows us to analyze an industry through the identification and analysis of five forces: the rivalry between competitors, the threat of new competitors, the threat of entry of substitute products, bargaining power of suppliers and the bargaining power of consumers.
The forces of the threat of entry of new competitors, the threat of entry of substitute products, bargaining power of suppliers and the bargaining power of consumers affect the strength of the rivalry between competitors, so it is usually the most powerful force five.
Analyze these forces allows us to primarily determine the degree of competition in the industry, so we can know what is so attractive and identify opportunities and threats, so we can develop strategies that allow us to seize these opportunities and / or face such threats.