Porter's Five Forces model is explained in detail with diagram of model.
Porter's Five Forces
Porter’s Five Forces model was named so because it was introduced in 1979 by Michael E Porter of Harvard Business School. This model was introduced to know the profit potentials of business. If these forces are strong that means your profit potential is strong. Whenever you are making entry in new business or you are going to develop your business strategy, you have to analyse this porter’s five forces model. In simple words it checks the competitive challenges which you are going to face in your business. This Porters model is used for the evaluation of a specific work environment. The Porter’s Five Forces Model is as follows:
1. Bargaining Power of Supplier
Whenever you are developing a business strategy or entering into new business you have to check the bargaining power of supplier. For this you have to check the number of suppliers from which you are going to buy the raw materials. If there are few suppliers for your raw material then the price control will be in the hands of supplier but if there more suppliers available then the bargaining power will be in your hands which is a good sign for your business. There will be more chances for your business to save cost on raw materials and earn a handsome profit.
2. Bargaining power of Buyer
The bargaining power of buyer is almost similar as of bargaining power of supplier in porter’s five forces. If the targeted customers for your product are few then the buyers will take advantage of it and they will start bargaining on the price of your product. Suppose you enter into a market to buy a product which is less in demand, you will be the price setter as a buyer because it is the weak point of seller who is selling low demand product. So, always choose the product which is in demand from the buyer otherwise you have to face this issue.
3. Threat of New Entrant
This is the 3rd force in Porter’s Five Forces. If you are entering in such industry where the entry of new business is easy and there are no entry barriers like investing heavy capital, have high knowledge of technology and location then soon there will be a lot of competition in the market even if your product is of high quality. Let’s take the example of a market where entry is easy like grocery stores near your homes. There are no strict entry barriers for new entrants because they are not required to invest heavy capital, they can work with limited or even zero knowledge of technology and on any location where customers are available. They just have to buy products from the companies and sell them on their stores because grocery is such thing which is required on daily basis by everyone. Porter has advised us to eliminate this threat by checking quality of your product, cost of product, satisfaction of your customer and make your business stronger that if a new business enters into your market they find it hard to compete your product level.
4. Threat of Substitute
In this you have to check the already available close substitutes of your product. If the substitutes are available then it will be difficult for your product to survive as a new business. To avoid this add more value to your product, your product should have some unique qualities which other competitors find hard to give, reduce your product cost from the prices of your competitor’s product. If it is easy to make your product’s substitute then it will be a threat for your business because anyone can copy your product.
If the above 4 forces in porter’s five forces are at high end it means it is difficult for you to compete in that specific market.
5. Rivalry among Competitors
It is the rivalry among existing firms for their survival in porter’s five forces when the exit barriers are high. It is obvious that every business has its competitors. If a business thought of exit from the market then they will face high exit barriers and they have to compete with their competitors for their survival. Due these exit barriers they have to remain within that market even if the profit margin is low. Analyse the market and check the exit barriers also because if in future you thought of shifting your business to new market you find it easy not difficult.
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