Porter's Five Forces
Porter’s five forces
Porter's five forces model is a framework used as part of the strategic analysis stage of the strategic planning process.
Porter looked at the structure of industries. In particular he was interested in assessing industry attractiveness, by which he meant how easy it would be to make above average profits .
He concluded that industry attractiveness depends on five factors or forces: * competitive rivalry * threat of new entrants * threat of substitutes * power of customers / buyers * power of customers
Threat of new entrants
New entrants into a market will bring extra capacity and intensify competition.
The threat from new entrants will depend upon the strength of the barriers to entry and the likely response of existing competitors to a new entrant.
Barriers to entry are factors that make it difficult for a new entrant to gain an initial foothold in a market. Major sources of barriers to entry are: * Economies of scale, where the industry is one where unit costs decline significantly as volume increases, such that a new entrant will be unable to start on a comparable cost basis. * Product differentiation, where established firms have good brand image and customer loyalty. The costs of overcoming this can be prohibitive. * Capital requirements, where the industry requires a heavy initial investment (e.g. steel industry, rail transport). * Switching costs, i.e. one-off costs in moving from one supplier to another (e.g. a garage chain switching car dealership). * Access to distribution channels may be restricted (e.g. for some major toiletry brands in the UK 90% of sales go through 12 buying points, i.e. chemist multiples and major retailers). It is therefore difficult for a new toiletry product or manufacturer to gain shelf space. * Know-how. It is much more difficult to penetrate a business where considerable know-how and skills are needed than to enter a simple, basic market.
Porter's five forces model is a framework used as part of the strategic analysis stage of the strategic planning process.
Porter looked at the structure of industries. In particular he was interested in assessing industry attractiveness, by which he meant how easy it would be to make above average profits .
He concluded that industry attractiveness depends on five factors or forces: * competitive rivalry * threat of new entrants * threat of substitutes * power of customers / buyers * power of customers
Threat of new entrants
New entrants into a market will bring extra capacity and intensify competition.
The threat from new entrants will depend upon the strength of the barriers to entry and the likely response of existing competitors to a new entrant.
Barriers to entry are factors that make it difficult for a new entrant to gain an initial foothold in a market. Major sources of barriers to entry are: * Economies of scale, where the industry is one where unit costs decline significantly as volume increases, such that a new entrant will be unable to start on a comparable cost basis. * Product differentiation, where established firms have good brand image and customer loyalty. The costs of overcoming this can be prohibitive. * Capital requirements, where the industry requires a heavy initial investment (e.g. steel industry, rail transport). * Switching costs, i.e. one-off costs in moving from one supplier to another (e.g. a garage chain switching car dealership). * Access to distribution channels may be restricted (e.g. for some major toiletry brands in the UK 90% of sales go through 12 buying points, i.e. chemist multiples and major retailers). It is therefore difficult for a new toiletry product or manufacturer to gain shelf space. * Know-how. It is much more difficult to penetrate a business where considerable know-how and skills are needed than to enter a simple, basic market.