Porter's Five Forces

The 5 forces is a model which was devised by Michael Porter; it is basically a framework for analysing the nature of competition in an industry. Every industry is extremely diverse to the next and this is why they are able to achieve such different profit margins. (e.g. the soft drinks industry has very high profit margins)

High profit margins are associated with;

Low profit margins are associated with;

Weak suppliers

Strong suppliers

Weak consumers

Strong consumers

Low opportunities for substitutes

High opportunities for substitutes

High entry barriers

Low entry barriers

Little competitive rivalry

Intense competitive rivalry

This table highlights Porter’s 5 forces;

The threat of new entrants to a market; if new businesses enter a market they can quickly gain market share and so rivalry will intensify. If barriers of entry are low (to an industry this generally means that the threat of new entrants will be high), the barriers to entry include; initial investment cost, the economies of scale already achieved by established firms in the industry, the difficulty it is to access suppliers or distribution channels, the regulatory or legal restrictions imposed on an industry, the existing products in the market and the strength of their USP’s, the potential retaliation which could occur from existing businesses.

The bargaining power of suppliers; if suppliers have bargaining power then they will exercise power, by increasing prices, this will squeeze profit margins from an industry (or force firms to pass on the increased price to the customer). Whether a…