Economics: Porter’s Five Forces Model

Entry threat of new competitors: new firms are more likely to be attracted to profitable markets that have demonstrated the ability to yield high returns. This is likely to result in the falling of the abnormal profit rates towards zero unless the incumbents seek ways and means of blocking the entry of new firms into the industry.

The intensity of competitive rivalry: to most firms, the intensity of the rivalry shared with the competitors acts as the main determinant of the level of competitiveness that the industry is likely to witness.

Buyers’ bargaining power: this refers to the controlling effect that the buyers have relative to the firm, meaning that an organization remains under pressure. Eventually, this is bound to impact how sensitive the customers are to changes in prices.

The threat of substitutes: substitute products in the market are a real threat to the products of a firm because customers are more likely to switch to brands marketed by the competitors.

Suppliers’’ bargaining power: This is the market of inputs. Suppliers of components, raw materials, services (for example, expertise), and labor to an organization could be regarded as sources of power over the organization (Porter, 2008). This is especially the case when the substitutes are few. In such a case, suppliers have the upper hand and as such, they may refuse to cooperate with the organization if their grievances are not addressed. They could also for example charge exorbitant prices for the provision of unique resources.

References

Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard Business Review, 86-104.