Porter’s five forces model of competitive analysis is a powerful and popular tool for assessing the main competitive forces in any industry and their
strength and importance to an organization.
This model holds that the state of competition in an industry is the sum of competitive pressures operating in five areas of the overall market:
a) Rivalry among current players:
There is always a tough fight in any industry among current players. Rivalry among existing players can affect the prices, quality, profitability etc. to a great extent.
All existing firms try to do their best in terms of products, prices, costs, services to customers, production facilities, product development, advertising, sales force, etc.
b) Threat of new entrants:
New entrants are always a powerful source of competition because they generally enter with new products/ offers/capacities /product range, etc.
The bigger the new entrant, the more severe the competitive effect new entrants also place a limit on prices and affect the profitability of existing players.
c) Bargaining power of customers:
There is always a threat to the loyalty of a customer. Particularly in competitive markets, the customer always has a dominating position. The bargaining power of a customer increases when there are new entrants or substitutes in market.
d) Bargaining power of suppliers:
If the suppliers are limited in number or if they have other buyers then they can show their bargaining power. They may demand better prices for raw materials and other inputs of the industry and, therefore determine industry attractiveness and profitability.
e) Threats from substitutes:
Substitute products offering a better price and/or performance to the consumer can drastically change the competition in an industry. For example, expensive cotton clothes are mainly replaced by inexpensive and durable polyester clothes. Substitutes usually limit the sales, prices and profits in an industry.
The five forces together determine industry attractiveness/profitability because these forces influence the causes that underlie industry attractiveness/profitability.