Porters Five Forces Model - Essay Example

According to this model, it is necessary to consider five factors such as the threat of new entrants, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the intensity of competitive rivalry while assessing an industrial environment.

The threat of new entrants

Profitable markets that offer a high rate of returns to investors would probably attract more new entrants.

Threat of substitutes

Availability of substitutes increases the tendency of customers to switch their demand to alternative products or services. To illustrate, coffee is a close substitute for tea. While analyzing the threat of substitutes in an industry, the marketer must also consider a number of factors such as buyer’s inclination to substitute, prices of substitutes, switching costs, and availability of substitutes. An industry having few close substitutes is recommended to be the most attractive segment.    

Bargaining power of buyers

Buyer power indicates the customer's ability to influence marketers and it mainly depends on buyer volume, availability of substitutes, and degree of market competition. An industry with low buyer power is potential for business operations.

Bargaining power of suppliers

Likewise, supplier power reflects the ability of suppliers to put the organization under pressure. When there are few substitute products/services and supplying firms, supplier power over the marketer is relatively high. Such an industrial environment would not be beneficial for a business.   

The intensity of competitive rivalry

This factor plays a pivotal role in determining the competitiveness of an industry in the majority of the cases. An industrial sector where the intensity of competitive rivalry is low is the most potential for making an investment.

This model is widely used for micro-environment analysis of industries since its development. For instance, it can be effectively applied to assess the potentiality of the airline's industry in order for making a decision regarding whether or not to invest.