2.3: 5 Forces Model – Concept

The Five Forces Model, developed by Michael Porter, offers a systematic approach to assessing the competitive dynamics of an industry, helping organizations understand the forces that can influence their competitive position and profitability.

The Five Forces are:

• Supplier Power: How much control do suppliers have regarding pricing, quality, or terms? In industries where suppliers are concentrated, and there are limited alternatives, suppliers can dictate terms, impacting the profitability of businesses.
• Buyer Power: If customers have numerous options and can easily switch between products, there is pressure on companies to provide superior value at competitive prices.
• Threat of New Entrants: How easy is it for new competitors to enter an industry? Barriers to entry, such as significant capital requirements or stringent regulations, act as deterrents to new players and protect the profits of existing companies.
• Threat of Substitutes: Substitutes are alternative products or services that can fulfill a similar need. When substitutes are abundant, companies may lose pricing power.
• Rivalry Among Existing Competitors: It measures industry competition through factors like market concentration, growth, and tactics. Intense rivalry can erode profit margins, prompting innovation and differentiation.

The Five Forces Model studies the five external competitive forces that can threaten a business's profitability.

Supplier Power assesses the influence suppliers have in the industry. Limited competition among suppliers can allow them to dictate terms and prices, negatively affecting a company's profitability.

Buyer Power evaluates the influence customers have over the market. When customers have many options and can easily switch brands, companies must offer value and competitive prices to remain profitable.

The threat of New Entrants considers the ease with which new competitors can enter the market, potentially affecting industry profitability. Barriers to entry, such as capital requirements or regulatory hurdles, make it less attractive for new players.

The threat of Substitutes examines alternative products or services that can fulfill a similar need. The availability of close substitutes can limit a company's ability to fix prices.

The Rivalry Among Existing Competitors assesses the intensity of competition among existing players, which can erode profit margins. Market concentration, industry growth, and competitive tactics contribute to this rivalry.

• Five Forces Model – Porter's systematic approach to assessing competitive dynamics.
• Supplier Power – Control the suppliers have on pricing, quality, and terms.
• Buyer Power – Consumer ability to switch products, influencing value and prices.
• Threat of New Entrants – Ease for new competitors to enter an industry.
• Rivalry Among Existing Competitors – Measure of industry competition affecting profit margins.

• Define Five Forces Model – Explain Porter's approach to assessing competitive dynamics (e.g., 5-forces model).
• Contrast Supplier Power vs Buyer Power – Explain key differences in influence (e.g., pricing, value).
• Explore Threat of New Entrants – Understand barriers to entry in an industry (e.g., capital requirements, regulations).
• Explain Rivalry Among Existing Competitors – Understanding the intensity of industry competition and its effects.
• Apply in Context – Show how the model can influence business decisions and strategy.

• What is the Five Forces Model and how to assess competitive dynamics?
• How does Supplier Power differ from Buyer Power in terms of influence?
• What factors can deter new competitors from entering an industry?

• Students – Understand How the Five Forces Model supports business strategy understanding.
• Educators – Provides a clear framework for teaching market dynamics.
• Researchers – Shed light on industry competition for economic studies.
• Business Strategists – Offer insights and practical application for business planning.