Porter developed the five forces analysis as a more rigorous variation of the widely used SWOT analysis. In contrast to the SWOT analysis, the five forces survey the business environment, rather than examining a particular firm itself. Along with the PEST analysis , it digs deeper into the O pportunities and T hreats of the SWOT. The five forces Porter includes in his analysis comprise threats from new entrants to an industry, rivalry from existing firms in the industry, the threat of substitution from outside the industry, and the respective power of buyers and sellers.

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When a company has no competitors, they can charge almost any price for their product. As more and more competition enters the market, profits drop until joining the industry is not longer appealing to new ventures.

Barriers to entry also deter this new competition and can result in monopolies if they become sufficiently high.

Porter's Competitive Advantage - Knowledge Center

Substitution products are not simply a different brand Pepsi vs. Coke , but an alternative product or service altogether cola vs. The demand elasticity of a product can be a good proxy for how vulnerable it is to substitution. In an industry that has only one consumer or a handful of very powerful consumers, these buyers have a significant impact.

The greater the asymmetry between the buyer and the supplier the closer the relationship is to a monopsony the more buyers can push for lower prices. Suppliers is one market will be buyers in another, so the similar factors are at play number of suppliers, cost of switching but from a different angle. Where new entrants pose an external threat to companies, they also face competition from other established firms within their industry.

Generally, the number and capability of competitors is the primary factor in determining the level of rivalry within a sector, but even excluding outright collusion, companies may adhere to informal codes of conduct that inhibit competition.

Each of these forces creates pressure on the industry, pushing it towards perfect competition. Successful businesses can still apply their unique strengths core competencies, networks, etc. For this reason, markets under less pressure are often seen as more profitable or attractive.

One of the strengths of the five forces framework is its elegance. Start with the template below and list the factors contributing to each force.

Just like a SWOT analysis, list the factors in each category and illustrate the most salient. If it is helpful, you can further analyze factors in each category with an additional spider map.

Even citizens looking to invest in a company can make use of the framework to estimate the future of the company in question. Are you thinking of starting a small business? Opening a restaurant or food truck?

Maybe an online store or service? Check out the rest of our Business Articles and Resources!

Porter’s Five Forces of Competition • The Strategic CFO

FREE TRIAL For Teachers For Business For Film. Look for other articles in the Business Resources section. The Five Forces The five forces Porter includes in his analysis comprise threats from new entrants to an industry, rivalry from existing firms in the industry, the threat of substitution from outside the industry, and the respective power of buyers and sellers.

Buy Competitive Strategy by Michael Porter on Amazon. Some factors that increase barriers to entry: Required capital investments Key intellectual property Specialist knowledge or expertise Economies of scale Regulation, governmental or otherwise. Some important factors to consider: Relative prices of potential substitutes Relative performance of potential substitutes Ease of switching Customer inertia Cost of switching.

More factors to consider: Cost of switching to a new supplier Information available to buyers Essentialness of product to the buyer s Price sensitivity of buyers Total size of the market. Some other factors to consider: Employee solidarity Strength of distribution channels Existence of commodity products Ability of the buyer to move production in-house Influence of supplied item on cost.

Specific factors that increase rivalry: Large number of firms Barriers to exit High fixed costs Low customer loyalty Slow market growth.

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