What Is Five Forces

Competitive environments are defined by the identity, track record, financial strength and market share of key competitors. Harvard Professor Michael Porter 's Five Forces model can be used to evaluate a company 's competitive position. These five forces are barriers to entry (the ability of new players to enter the market), buyer power (the ability of customers to influence price),

Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based on the market entry barriers. They can take diverse forms and are used to prevent an influx of firms into an industry whenever profits, adjusted for the cost of capital, rise above zero. In contrast, entry barriers exist whenever it is difficult or not economically feasible for an outsider to replicate the incumbents’ position (Porter, 1980b; Sanderson, 1998) The most common forms of entry barriers, except intrinsic physical or legal obstacles, are as follows:

Threat of New Entrants - The easier it is for new companies to enter the industry, the more cutthroat competition there will be. Factors that can limit the threat of new entrants are known as barriers to entry. Some examples include:

The threat of new entrants is moderate. It is relatively easy for a company to enter this market because there are not a lot of legal barriers. But a smaller company that has just entered the market would have a tougher time competing with some of the larger companies – an obvious reason being that larger companies can have larger inventories. Another reason is that larger companies can do things to weaken the smaller companies, such as offer discounts, sales promotions, and increase spending on advertising. Since most of the companies in this industry are competing on

Threat to new entrants: There is no barrier to entry in this industry but it might be difficult for newcomers to compete against existing well establishing companies.

In the article, “The Five Competitive Forces that Shape Strategy,” Michael Porter argues that the five forces are an important element for managers and investors in the business industry. Porter stated that it is important to “understand the competitive forces, and their underlying causes” which many companies will use to determine if they will gain profit or not (Porter 80). Companies determine their profitability of the industry through the level of the force that they face. For instance, when the forces are favorable, most companies will be profitable. Porter gives a detail description of the five forces and explains the importance of each force. The five forces are the threats of new entrants, the power of the buyers, the power of the suppliers, the threats of substitute for products or services, and the rivalry among existing competitors. Porter believes that “a company strategist who understands the competition extends well beyond existing rivals will detect wider competitive threats and be better equipped to address them” (Porter 93). In other words, when strategists understand the different forces it will benefit them to make better decisions and to be ready to face the different challenges between competitors. In the article, Porter’s main goal is to present the importance of the five forces to the audience.

Entrants erode the market and rarely grow it enough to the incumbent’s advantage. New entrants have an impact on the industry business but at a moderate level. This is mainly because new firms will find it difficult to compete against the incumbents’ strong brand, like Starbucks and McDonalds, and because the market is saturated. However, the costs of entry are relatively low. Most of the raw materials are cheap and the distribution chain is not complicated. This makes it easy for new companies to enter the market. Also, established companies might leverage their brands as they enter the industry to compete against the incumbents.

The threat of new entrants refers to the threat posed by new competitors within an industry. If it is easy for new firms to enter the industry barriers to entry are low and the threat of new entrants is high. A profitable industry attracts more competitors. Economies of scale, learning curve effects and other macro factors impact the nature of an industry 's

Porter’s five forces analysis is a tool is useful for us to analyse the threat of competition in an industry. Porter believed that the industries were influenced by five forces; competitive rivalry, threat of new entrants, bargaining power of suppliers, bargaining power of buyers, and the threat of substitutes. Analysing these areas can allow you to see attractiveness of the market and find a competitive advantage.

Threat of New Entrants – The threat of new competitors entering an industry is high when initial

Q2: What kinds of competitive forces are industry members facing? The most powerful and widely used tool for identifying competitive forces and assessing the strength and importance of each is the five-forces model of competition which is typically described as follows: (Thompson, Strickland and Gamble 2008)

The Porter`s five forces are threats of new entrants, the bargaining power of buyers ,product substitution and intensity of rival of rival among competitors .These forces measure the competitiveness of the market and also helps the company to identify strategies to use to penetrate such and gain market share.

According to Michael Porter, “Every industry has an underlying structure, or a set of fundamental economic and technical characteristics, that give rise to these competitive forces” (Porter 1998:23). The forces mentioned above are: industry rivalry, threat of new entrants, threat of substitute products, bargaining power of suppliers and bargaining power of buyers. Additionally, Porter mentioned that: “Knowledge of these underlying sources of competitive pressure provides the groundwork for a strategic agenda or action” (Porter 1998:22).

If an industry is profitable, it will become a magnet to attract more competitors looking to do same business with us. If it is easy for these new entrants to enter the market, this poses a threat to the firms already competing in that market. Threat of new entrants is one of the forces that shape the competitive structure of an industry (Marc, 2014). A high threat of entry means new competitors are attracted by the profits of the industry and can enter the industry easily. New competitors entering the marketplace can make the market share and profitability of existing competitors more threaten cause the existing competitor to make some changes to existing product quality or price levels. A high threat of new entrance can make an industry more competitive and decrease profit potential for existing competitors whereas a low high threat of new entrance can make an industry less competitive and increases profit potential for the existing

Porter’s Five Forces model is used to evaluate the degree of rivalry between competitors in a given industry through assessing the four forces that lead to this outcome. These forces are the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, and the threat of substitute products.