Porter developed the five forces of competitive position in the year 1979. The framework is used for evaluating and assessing the competitive strength and position of a business firm. The theory is based on the concept that the forces determine the attractiveness and…
The five forces are threat of new entrants, bargaining power of the purchasers, bargaining power of the suppliers, threat of the substitute products or services and the rivalry among the existing competitors (Porter 6 – 10). The following diagram shows the five forces.
Foremost, the bargaining power of the suppliers is driven by the number of suppliers for every essential input, the uniqueness of the inputs or services, the size, and strength of the supplier and the cost involved in switching from one supplier to another. This force includes assessment of the probability of the suppliers to increase their prices. Secondly, the bargaining power of the buyer includes assessing of the probability that the buyers will bring down prices of commodities and services. The assessment is controlled by the number of purchasers available in the market, the significance of every individual buyer to the firm and the cost likely to occur if the buyer switches from buying in one firm or the other. When a business has a few of powerful buyers, the firm is in a position to dictate the terms to the buyers.
Thirdly, competitive rivalry is driven by the capability of the competitors in the market and their number. When a big number of competitors offer undifferentiated services or products, they reduce the attractiveness of the market. Substitution threat applies in that, when there are close substitute products, the likelihood of increased switching of customers to the alternatives occurs responding to the increase in prices. In such a scenario, the market attractiveness and the suppliers’ power reduce. Threat of new entries implies that a profitable market attracts new entrants in the business and erodes profitability of a firm. Not unless incumbents have durable and strong barriers to entry, the profitability goes down to a competitive rate. The barriers to entry in the market include ...
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