In the year 1979, Famous strategy Guru Micheal Porter proposed a framework, popularly known as ‘Porter’s five force analysis’ to analyze the level of competition in an industry. Porter did not found effectiveness in SWOT Analysis to assess overall opportunities and threats. Competition in any industry is affected by certain factors which determine the level of competition and the attractiveness of that particular industry. The following are the five forces which Porter prefer essential to get analyzed by each and every firm in any industry
- Threat of new entrants: In any industry, given a chance, there is always a threat of entry of new potential firms, which means sharing of profits and market share of existing firms. this force examines the level of difficulty new entrants face while entering the given industry. The new firm may face certain barriers while entering the industry like economies of scale, capital requirements, access to the distribution channel, latest technology etc.
- Threat of substitutes: this threat is generated from outside the industry when a substitute product of another industry is available in the market at lower cost and higher quality customers may shift from one product to another. Availability of close substitutes perceived level of product differentiation, buyer’s switching cost etc. are important elements to assess how strong substitutes impact is.
- Competitive Rivalry: Intensity of rivalry among firms within the industry is also a source of power. Rivalry is high when there are just a few businesses and equally competent with nearly equal resources and capabilities. few things they could improve to take a step ahead can be reduced prices, differentiating, aggressive marketing campaigns etc.
- Bargaining Power of Supplier: Different input supplier of the firm e.g. Suppliers of labor, raw materials, spare parts etc. can be a source of power over the firm. If there are few suppliers, then they may charge higher prices or they may refuse to supply. In this case, supplier is strong. The fewer the suppliers, the more power they have. Firms are in a better position when there are a number of suppliers. some important component in this is – number of suppliers in the industry, switching costs of firms, the presence of available substitutes etc.
- Bargaining Power of Buyers: Bargaining power of buyers means the potential of buyers to bargain down the prices charged by the firms in the industry and to increase the firms cost in the industry by demanding better quality and better service. Strong buyers can reduce profits of an industry by lowering the prices and increasing the costs. They have full knowledge of the product. Number of buyers, Availability of substitutes, buyers switching cost etc. affects firms in any industry