Porter’s Five Forces model was developed in 1979. The model summarizes the 5 factors, which affect the performance of a company by five forces. These 5 forces are as follows:

1. Bargaining power of customers;
2. The threat of potential entrants;
3. Bargaining power of suppliers;
4. Threat of substitute products;
5. The intensity of intra-industry competition.

The weight of Porter’s Five Forces determines the ability of firms involved to make a profit. If all forces are high, profits will be limited. Conversely, if the forces are weak, it is theoretically possible to generate a significant profit. The essential point is therefore to prioritize these forces so as to identify the key success factors in the industry, that is to say, the strategic elements that must be mastered to gain a competitive advantage.

The bargaining power of customers

The main influence of customers on a market occurs through their ability to negotiate. According to Porter’s Five Forces, influence on the price and sales conditions — terms of payment and associated services — determine the profitability of the market. The concentration level of their customers pay more or less power; few clients facing many producers have greater opportunities to trade (eg supermarkets). The power of customers is even greater than the products are standard and there are substitutes readily available (cost of switching down).

In Porter’s Five Forces, the power of customers is high when:

* They are concentrated

* Suppliers are numerous and dispersed

* There are sources of supply substitution

* The cost of transfer is low and predictable (when the customer changes supplier)

* There is a threat to integrate backwards from the customers

The bargaining power of suppliers

In terms of cost or quality, the ability of suppliers to impose conditions on a market has a direct impact and is proportional to the customer. A small number of suppliers, a strong brand, highly differentiated products are all factors that increase the cost of switching and therefore the power thereof.

The threat of substitutes

According to Porter’s Five Forces, substitutes are not part of the market, but represent an alternative to offer. It may be of different products to meet the same need (eg: MP3 download / Compact Disc) or product affect demand (electric vehicles / fossil fuels). The substitutes are characterized by a cross-elasticity is positive. In fact, the increased price of a good cause therefore increasing the quantity sold of each other.

The intensity of competition within the sector

In Porter’s Five Forces, competitors struggle within the industry to increase or simply maintain their position. There are between firms in the balance of power more or less intense, depending on the strategic nature of the sector, the attractiveness of the market, its development prospects, the existence of barriers to entry and exit, the number, size and diversity of competitors, the importance of fixed costs, the possibility of achieving economies of scale, character banal or perishable goods, etc.

The threat of potential entrants

Porter’s Five Forces states that the arrival of new competitors is influenced by barriers to entry, the initial investment required, tickets, patents already in place, standards, protectionist measures, the image of the industry and companies already established, cultural barriers, technical standards, etc.. All these facilities make entry more difficult for another firm. Behavior of actors in the sector (eg retail, automotive – is the last in Tucker in the 1930s).

The role of government

Although the government does not appear explicitly in Porter’s Five Forces, its influence is taken into account and can affect each of the five forces. Policy and legislation implemented to determine how effective each of the forces exerted on the market. For example, the entry may be subject to approval or conversely be subsidized. This analysis tool is still questionable

Using a concrete model of Porter’s Five Forces in businesses

The objective of this model is to identify key success factors of the environment, ie the strategic elements that must be mastered in order to obtain a competitive advantage. For this it is necessary to prioritize the 5 forces to determine what strategic actions should be undertaken first.

Reviews of the Five Forces Model

The 5 Forces Model is the basic tool of analysis of environmental strategy. It is however criticized for several reasons:

* It is based on a rhetoric of confrontation (strength, power, etc..) Which focuses on threats as opportunities and leaves little room for collaboration strategies.

* It implies that the strategy is basically to adapt to environmental conditions, precluding approaches based on the resources and skills that emphasize endogenous vision of success.

* It can be completed: some authors (notably in continental Europe) add a sixth force, government influence. This is known as model 5 (1) forces. Porter himself said in later writings the role of supplements (eg software industry for microcomputer).

* Each business case is specific. It is necessary to integrate the application in the enterprise model of 5 forces a hierarchical order of importance as the business of the company.

* Also note that this tool is only applicable to large companies and SMEs to large (at least 300 people), it becomes unrepresentative if not useless for small and small SMEs.

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