Porters 5 Forces
Michael Porter’s Factor 1) Threat of New Entrants -
The easier it is for new companies to enter the industry, the more cut-throat competition there will be. Factors that can limit the threat of new entrants are known as barriers to entry. Some examples include:
Existing loyalty to major brands
Incentives for using a particular buyer (such as frequent shopper programs)
High fixed costs
Scarcity of resources
Government restrictions or legislation
Entry protection (patents, rights, etc.)
Economies of product differences
Brand equity
Switching costs or sunk costs
Capital requirements
Access to distribution
Absolute cost advantages
Learning curve advantages
Expected retaliation by incumbents
Michael Porter’s Factor 2) Power of Suppliers
This is how much pressure suppliers can place on a business. If one supplier has a large enough impact to affect a company’s margins and volumes, then they hold substantial power. Here are a few reasons that suppliers might have power:
There are very few suppliers of a particular product
There are no substitutes
The product is extremely important to the buyer, they cannot do without it
The supplying industry has a higher profitability than the buying industry
Supplier switching costs relative to firm switching costs
Degree of differentiation of inputs
Presence of substitute inputs
Supplier concentration to firm concentration ratio
Threat of forward integration by suppliers relative to the threat of backward integration by firms
Cost of inputs relative to selling price of the product
Michael Porter’s Factor 3) Power of Buyers/ Customers
This is how much pressure customers can place on a business. If one customer has a large enough impact to affect a company’s margins and volumes, then they hold substantial power. Here are a few reasons that customers might have power
Small number of buyers
Purchases of large volumes
Switching to another (competitive) product is simple
The product is not
The easier it is for new companies to enter the industry, the more cut-throat competition there will be. Factors that can limit the threat of new entrants are known as barriers to entry. Some examples include:
Existing loyalty to major brands
Incentives for using a particular buyer (such as frequent shopper programs)
High fixed costs
Scarcity of resources
Government restrictions or legislation
Entry protection (patents, rights, etc.)
Economies of product differences
Brand equity
Switching costs or sunk costs
Capital requirements
Access to distribution
Absolute cost advantages
Learning curve advantages
Expected retaliation by incumbents
Michael Porter’s Factor 2) Power of Suppliers
This is how much pressure suppliers can place on a business. If one supplier has a large enough impact to affect a company’s margins and volumes, then they hold substantial power. Here are a few reasons that suppliers might have power:
There are very few suppliers of a particular product
There are no substitutes
The product is extremely important to the buyer, they cannot do without it
The supplying industry has a higher profitability than the buying industry
Supplier switching costs relative to firm switching costs
Degree of differentiation of inputs
Presence of substitute inputs
Supplier concentration to firm concentration ratio
Threat of forward integration by suppliers relative to the threat of backward integration by firms
Cost of inputs relative to selling price of the product
Michael Porter’s Factor 3) Power of Buyers/ Customers
This is how much pressure customers can place on a business. If one customer has a large enough impact to affect a company’s margins and volumes, then they hold substantial power. Here are a few reasons that customers might have power
Small number of buyers
Purchases of large volumes
Switching to another (competitive) product is simple
The product is not