Use Porter’s five forces to find out whether new products or services are potentially profitable

reogma|Use Porter's five forces to find out whether new products or services are potentially profitable

Porter's Five Forces analysis is a framework that helps to analyze the level of competition within a certain sector. It is particularly helpful when starting a new business or when entering a new sector of the industry.

According to this model, Competitiveness not only arises from rivals, Instead, the state of competition in an industry relies on five fundamental forces: the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, the threat of substitute products or services, and the rivalry of the existing players.

The combined strength of these forces determines an industry's profit potential and therefore its attractiveness. Almost no business in the industry receives lucrative returns on investments if the five forces are extreme (e.g. the airline industry). However, if the powers are mild (e.g. the soft drink sector), there is room for higher returns.

  • Introduction
  • Components of Porter’s Five Forces Model
  • Use of the Information from Porter’s Analysis Tool
  • How can SMEs apply the Porter’s Five Forces Model?
  • Using the tool
  • Example of Porter’s Five Forces Model Analysis
  • Porter’s Five Forces Model Analysis tips
  • Limitations of Porter’s Five Forces Model Analysis

Introduction

Porter’s five forces model is an analysis tool that uses five industry forces to assess the degree of competition in an industry and its profitability level.

Michael E. Porter created the Five Competitive Forces model and it is featured in his book "Competitive Strategy: Techniques for Analyzing Industries and Competitors." In 1980, it was released. The 'five-force tool' has since become an effective strategy for assessing the structure of an enterprise in strategic processes.

The five-force model by Michael Porter is based on the understanding that the opportunities and challenges in the external world of companies should be faced by a corporate strategy. In particular, a strategic approach should be focused on an understanding of the structures of the market and the way they shift.

Porter has identified five competitive forces that shape every industry and every market. The level of competition and therefore the viability and attractiveness of an industry are determined by these forces. The aim of corporate strategy should be to modify these competitive forces in a way that strengthens the position of the organization. The Porters model encourages the study of a sector's driving powers. Management will determine how to control or exploit unique characteristics of their industry based on the information obtained from Porter's Five Forces Analysis.

Porter’s Five Forces analysis looks at five key areas mainly:

  • Threat of New entrants
  • Bargaining power of buyers
  • Bargaining power of suppliers
  • Threat of substitutes, and
  • Competitive rivalry (advantage).

Porter’s Five Forces model is an “outside looking in” business unit strategy tool that is used to assess the attractiveness or value of an industry structure.

The Competitive Forces analysis is made by the identification of 5 fundamental competitive forces:

Analysis of the Competitive Forces is carried out by defining 5 basic competitive forces:

Threat of New Entrants (how easy or difficult it is for new entrants to start competing, the obstacles that exist)

Threat of substitute Products or Services (how easy it is to replace our product or service, especially cheaper)

Bargaining power of buyers (how good the position of buyers is, can they work together to order large volumes)

Bargaining power of suppliers (how good the position of sellers, are there many or only few potential suppliers, is there a monopoly)

Competitive rivalry between the existing players (is there a clear competition between the current players, is one player very dominant or all are equal in strength / size)

Figure: Michael Porter’s Five Forces

reogma|Use Porter's five forces to find out whether new products or services are potentially profitable


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Porter's Five Forces analysis is a framework that helps to analyze the level of competition within a certain sector. It is particularly helpful when starting a new business or when entering a new sector of the industry. According to this model, Competitiveness not only arises from rivals, Instead, the state […]
reogma|Use Porter's five forces to find out whether new products or services are potentially profitablereogma|Use Porter's five forces to find out whether new products or services are potentially profitable

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