Porter's Five Forces: Shaping Industry Structure

Porter's Five Forces is a model proposed by Michael Porter (1985) that outlines a simple scheme of five forces that shape the structure of an industry.

Threat of New Competitors

The threat of new competitors should direct attention to potential entrants to the industry. New participants act as one of the concepts of strategies, the concept of entry barriers, and their relationship to industry profitability. Barriers to entry depend on factors such as:

• Economies of scale
• Product differentiation
• Intensity of capital requirements
• The importance of learning effects
• Degree of governmental regulation
• Ease of access to distribution channels
• Critical raw materials
• Advanced technology, etc.

Rivalry Between Industry Competitors

The rivalry between competitors is at the center of the forces that contribute to the attractiveness of the industry. This rivalry depends on the number of participants and the extent of it in a particular sector of the market.

Threat of Possible Substitutes

Substitute products are also a force that determines the attractiveness of the industry. They can replace the products and services of the industry or represent an alternative to meet demand. The impact that the threat of substitutes has on the profitability of the industry depends on such factors as:

• Availability of close substitutes
• Switching cost for the user
• Aggressiveness of producers of substitutes
• The contrast of the relationship value-priced between substitute products

Negotiating Power of Suppliers and Buyers

Porter suggests that there is a threat imposed on the industry due to excessive use of power by these two agents. An appropriate strategy from a business enterprise will attempt to neutralize the bargaining power of suppliers and buyers. This idea has changed today, and the idea that there should be a mutual benefit between supplier and buyer has developed. It is very important to have a balance and a good relationship between suppliers and buyers; this relationship should be collaborative rather than confrontational.