Five forces analysis

It is one of the methods of strategic analysis. Its name comes from the five factors that managers consider during examining the attractiveness of the sector for companies or potential investors.

Factors in five forces model

1. The impact of suppliers and their ability to exercise pressure on businesses in sector.
2. The impact of the buyers and the possibility to exert pressure businesses in sector
3. The intensity of competition within the sector.
4. The threat of the emergence of new manufacturers.
5. The threat of the emergence of substitutes.

The impact of suppliers (bargaining power of suppliers) depends on:

• Degree of concentration in the sector,
• Dependence of quality of the product on quality of the supplies,
• Uniqueness of the product supplied,
• Ease and cost of switching suppliers,
• A large share of the supplier in the creation of producers' profit in the sector,
• The possibility of the supplier to start production of the final product,
• Intensity of competition in the supplier industry.

The impact of buyers (bargaining power of buyers) depends on:

• The degree of concentration of customers
• Dependence of quality of the product on quality of the supplies,
• Uniqueness of the product,
• A large impact of the supplier in making profit for the buyer,
• Ease and cost of switching suppliers,
• The possibility of the purchaser to start production of the final product,
• Intensity of competition in the sector buyers.

The intensity of competition within the sector depends on:

• Concentration of the sector,
• The structure of the market share,
• The number of competitors.

The threat of the emergence of new products and substitutes depends on:

• Attractiveness of the sector, and especially the rate of demand growth and profitability of the sector. When the sector is more attractive, the greater is the risk of new competitors.
• Height of barriers to entry - when they are weaker, the threat of outside competition is greater. They include: economics of scale, high level of required technology, lack of access to distribution channels, formal barriers to market entry, trade barriers,
• The possibility of reprisals from the producers of the sector - if the producers who are already in the field are able to effectively defend access by the price war and closing the channels of distribution, the smaller the threat of the emergence of new rivals.

It should be noted that the threat of emergence of a substitute depends also on the rate of change of technology.

Five forces analysis — recommended articles

Bargaining power of buyers — Threat of new entrants — Economic environment — Competition — Market structure — International competitiveness — Bargaining power of suppliers — Competitive rivalry — Price taker

References

• Porter, M. E. (1979). How competitive forces shape strategy.