Porter's Five Forces
Business: BTEC Level 3 National Extended Diploma, topic 1.3.10
Porter's Five Forces
Porter’s five forces is a model that allows you to analyse the competitiveness of a business environment. The 5 forces model presents five different forces impacting the competitiveness of a business environment:
Porter's Five Forces
Bargaining power
- The bargaining power of suppliers relates to how much power suppliers in the market have. If suppliers have more power, the market may be less attractive, as suppliers can charge higher prices.
- The bargaining power of buyers relates to how much power buyers in the market have. If buyers have more power, the market may be less attractive, as buyers can demand a lower price.
- Often bargaining power is the relative number of people. If there is 1 supplier, they are likely to have more power than if there are 100 suppliers.
Barriers to entry
- Barriers to entry relate to how easy it is for a new business to enter the market. If barriers to entry are low, the market will be more competitive as new businesses are likely to enter.
Substitutes
- The threat of substitutes relates to whether customers are likely to buy an alternative product. If this threat is high, the market is less attractive, as customers are more likely to shop elsewhere.
- On a hot day, ice cream and lemonade might be substitutes.
Rivalry
- Rivalry amongst existing competitors refers to how much competition currently exists within the market. The greater the competition, the less attractive the market may be to other businesses.
- How intensely Coca-Cola and PepsiCo compete would be covered in this force.
Advantages of Porter's five forces
- Porter’s five forces model allows businesses to understand the competitiveness of a market and make decisions about their own competitiveness.
- Porter’s five forces model allows new entrants to consider how profitable a market may be.
- It is a good framework to identify strengths, weaknesses, opportunities and threats.
Test yourself on Porter's Five Forces
What is the consequence of suppliers having high bargaining power?
Which of the following are true about Porter's five forces?