What is it?Framework/theory Show
Porter's Five Forces of Competitive Position Analysis were developed in 1979 by Michael E Porter of Harvard Business School as a simple framework for assessing and evaluating the competitive strength and position of a business organisation. This theory is based on the concept that there are five forces that determine the competitive intensity and attractiveness of a market. Porter’s five forces help to identify where power lies in a business situation. This is useful both in understanding the strength of an organisation’s current competitive position, and the strength of a position that an organisation may look to move into. Strategic analysts often use Porter’s five forces to understand whether new products or services are potentially profitable. By understanding where power lies, the theory can also be used to identify areas of strength, to improve weaknesses and to avoid mistakes. Porter’s five forces of competitive position analysis:
The five forces are: 1. Supplier power. An assessment of how easy it is for suppliers to drive up prices. This is driven by the: number of suppliers of each essential input; uniqueness of their product or service; relative size and strength of the supplier; and cost of switching from one supplier to another. 2. Buyer power. An assessment of how easy it is for buyers to drive prices down. This is driven by the: number of buyers in the market; importance of each individual buyer to the organisation; and cost to the buyer of switching from one supplier to another. If a business has just a few powerful buyers, they are often able to dictate terms. 3. Competitive rivalry. The main driver is the number and capability of competitors in the market. Many competitors, offering undifferentiated products and services, will reduce market attractiveness. 4. Threat of substitution. Where close substitute products exist in a market, it increases the likelihood of customers switching to alternatives in response to price increases. This reduces both the power of suppliers and the attractiveness of the market. 5. Threat of new entry. Profitable markets attract new entrants, which erodes profitability. Unless incumbents have strong and durable barriers to entry, for example, patents, economies of scale, capital requirements or government policies, then profitability will decline to a competitive rate. Arguably, regulation, taxation and trade policies make government a sixth force for many industries. What benefits does Porter’s Five Forces analysis provide?Five forces analysis helps organisations to understand the factors affecting profitability in a specific industry, and can help to inform decisions relating to: whether to enter a specific industry; whether to increase capacity in a specific industry; and developing competitive strategies.
Related and similar practices
Which of the following describe the theory of national competitive advantage?The theory of national competitive advantage of industries is that the competitive advantage of certain industries in different nations depends on four aspects that form a "diamond." The four aspects are: 1) factor endowments, 2) domestic demand, 3) firm strategy, structure, and rivalry, and 4) related and supporting ...
Which of the following is an example of an advanced factor as proposed by Porter that a nation will possess?Which of the following is an example of an advanced factor, as proposed by Porter, that a nation will possess? an economic and strategic advantage that accrues to early entrants into an industry.
Which of the following factors according to Porter is most likely to give a country competitive advantage over another country?Which of the following factors, according to Porter's national Diamond, is most likely to give a country competitive advantage over another country? Skilled Labor. Porter argues that a nation's firms gain competitive advantage if _____________________________.
Which one of the following countries has promoted industrialization through policies of import substitution?Import substitution industrialization (ISI) was pursued mainly from the 1930s through the 1960s in Latin America—particularly in Brazil, Argentina, and Mexico—and in some parts of Asia and Africa.
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Which one of the following best describes the contribution of Porters theory of competitive advantage?
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