Five forces theory was derived by Michael porter, who was a consultant and professor at harvard university. He identifies analysis tools which focus on the competitiveness of a company or an industry .The porter’s five forces of porter’s model as follows:
Competitive Rivalry in Industry :
The increase in competitors in the market, distinctive qualities of the product, the market size and industrial growth. A highly competitive market mean it will constantly introduce innovation products or options which help to stay ahead of competitors. Competition is a factor which can determines to profit level of an industry and the average profit margin.
Threat of New Entrance:
All the investors focus on a profitable industry. The existing once create new barriers to avoid the entry of new entrants to avoid aggressive competition. It is because the high level of competition focus the reduction of price and it eventually results in declining profit margins. Also the new entrants come with huge investment to skip out the small business .For example, with the arrival of supermarket, it partially eliminated the departmental stores.
Threat of Substitute products:
A substitute product is the product which the competitors bring out in the market with similar features. For example, the email become a substitute for a letters. The new substitutes products will enter the market with additional features which will decline the demand of alternative product. Also the new substitute product may be on the same.
Bargaining Power of suppliers:
If there are minimal number of suppliers for a particular industry, then the bargaining power of suppliers will be high. Also it results from the high cost of product and also for lack of supply. If there are many suppliers then it results in the decrease in the power of bargaining of suppliers.
Bargaininsg Power of Customers:
The bargaining power of customers can be simply defined as the pressure that the customer exerts on the seller. The customer’s pressure increases when there too many suppliers for a period in a same industry. The customers pressure will be in the form of excess bargaining for lower price with better quality or in purchasing a limited quantity or pretending to give a long credit period. An industry with excess pressure in bargaining of customers cannot be considered as profitability.
*It aids in determining the level of competitiveness.
*Aids in developing cost cutting, profit boosting and resource maximizing methods.
*Forces like bargaining power of buyers and suppliers help in developing relationships between buyers and suppliers.
*This model solely takes into account the factors that are required for the above forces; all other components are omitted.
*This model will not be suitable for all industries, such as fashion, consumer taste, and so on, which cannot be determined using this model.
*The market will not always be stable, and as the market’s flexibility increases, so will the consequences. Due to the lengthy and time-consuming process, this model cannot be completed immediately.